Union Pacific Rail road reported net income of GH¢770million after interest expenses of GH¢320 million in a recent financial year. (The corporate tax rate was 36%.) It reported depreciation of GH¢960million in that year, and capital spending was GH¢1.2 billion. The firm also had GH¢4billion in debt outstanding on the books, was rated AA (carrying a yield to maturity of 8%), and was trading at par (up from GH¢3.8 billion at the end of the previous year). The beta of the stock is 1.05, and there were 200 million shares outstanding (trading at GH¢60 per share), with a book value of GH¢5 billion. Union Pacific paid 40% of its earnings as dividends and working capital requirements are negligible. (The Treasury bill rate is 7%, and risk premium was 5.5%).Required:Estimate the:Free Cash Flow to the Firm for the most recent financial year. Value of the firm now. Value of equity now.

Net Income= GH¢770 million Interest= GH¢320 million Depreciation = GH¢960 million capital…

Answered: Union Pacific Rail road reported net…

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 13P

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Question

Union Pacific Rail road reported net income of GH¢770million after interest expenses of GH¢320 million in a recent financial year. (The corporate tax rate was 36%.) It reported depreciation of GH¢960million in that year, and capital spending was GH¢1.2 billion. The firm also had GH¢4billion in debt outstanding on the books, was rated AA (carrying a yield to maturity of 8%), and was trading at par (up from GH¢3.8 billion at the end of the previous year). The beta of the stock is 1.05, and there were 200 million shares outstanding (trading at GH¢60 per share), with a book value of GH¢5 billion. Union Pacific paid 40% of its earnings as dividends and working capital requirements are negligible. (The Treasury bill rate is 7%, and risk premium was 5.5%).

Required:

Estimate the: