Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.52, expects to generate free cash flow of $49 million this year, and anticipates a 4% perpetual growth rate. The industrial chemicals division has an asset beta of 1.09, expects to generate free cash flow of $74 million this year, and anticipates a 3% perpetual growth rate. Suppose the risk-free rate is 2% and the market risk premium s 5%. a. Estimate the value of each division. . Estimate Weston's current equity beta C. Estimate Weston's current cost of capital. Is this cost of capital useful for valuing Weston's projects? How is Weston's equity beta likely to change over time? . Estimate the value of each division. The cost of capital for the soft drink division is *** %. (Round to two decimal places.)
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- Pear Inc. has an equity beta of 2. The expected market return is 20% and the risk free rate is 5%. The firm is financed half through equity and half through debt. Assume perfect capital markets. 1. Assume Pear’s management decides to decrease leverage to 1/3 of firm value. Estimate Pear’s cost of equity, cost of debt and cost of capital. Explain your workings 2. Assume Pear is expected to generate a cash flow of $300 million next year. This cash flow will grow in perpetuity at a rate of 10%. The capital structure is as in question 1 above. Pear has 10 million shares outstanding. Calculate Pear’s share price. Explain your workings.Suppose Alcatel-Lucent has an equity cost of capital of 10.2%, market capitalization of $11.20 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 6.5%, its marginal tax rate is 33%, the WACC is 9.03%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year FCF ($ million) D=dxv Interest 0 1 2 3 - 100 55 103 74 38.84 31.34 13.57 0.00 0.00 2.52 2.04 0.88 toSuppose Alcatel-Lucent has an equity cost of capital of 10.3%, market capitalization of $11.20 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 6.5%, its marginal tax rate is 32%, the WACC is 9.12%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year FCFE ($ million) 0 1 2 3
- Suppose Alcatel-Lucent has an equity cost of capital of 9.5%, market capitalization of $11.84 billion, and an enterprise value of $16 billion. Assume Alcatel-Lucent's debt cost of capital is 6.8%, its marginal tax rate is 35%, the WACC is 8.18%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? Data table af (Click on the following icon in order to copy its contents into a spreadsheet.) Year 0 1 2 100 48 103 FCF ($ million) D=dxV 49.21 40.75 Interest 0.00 3.35 17.31 2.77 3 72 0.00 1.18 - XXYZ is currently an all-equity firm with a total market value of $1,000,000. Earnings beforeinterest and taxes (EBIT) are projected to be $80,000 if economic conditions are normal. Ifthere is strong expansion in the economy, then EBIT will be 20% higher. If there is arecession, then EBIT will be 30% lower. The three states of the economy are equallylikely. XYZ is considering a (perpetual) debt issue of $150,000 with an interest (i.e.,coupon) rate of 6%. The proceeds will be used to repurchase shares of stock. There arecurrently 25,000 shares outstanding. Suppose that XYZ pays no taxes (that is, the tax rateis 0%). a) Calculate earnings per share, EPS, under each of the three economic scenariosbefore any debt is issued.Also, calculate the percentage changes in EPS when the economy expands orenters a recession. b) Repeat part (a) assuming that XYZ goes through with the recapitalization (that is,XYZ issues debt to repurchase shares at the current market price). Explain yourfindings.Suppose Alcatel-Lucent has an equity cost of capital of 9.1%, market capitalization of $10.36 billion, and an enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 5.5%, its marginal tax rate is 34%, the WACC is 7.68%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free cash flow, debt capacity, and interest payments are shown in the table: a. What is the free cash flow to equity for this project? b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the WACC method? a. What is the free cash flow to equity for this project? The free cash flow to equity for this project is: (Round all answers to two decimal places. Use a minus sign to indicate a negative number.) Year 1 2 FCFE ($ million) 0 3 Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Year 1 FCF ($ million) D=dxV² 45 39.60 Interest 2.62 0 - 100 47.64 0.00 Print Done 2 99…
- The FMS Corporation needs to raise investment money amounting to $40 million in new equity. The firm’s market risk is βM = 1.4, which means the firm is believed to be riskier than the market average. The risk free interest rate is 2.8% and the average market return is 9% per year. What is the cost of equity for the $40 million?Docile Partners Limited (DPL) has two lines of business, organized as two divisions, A and B. Division A generates a risk-free cash flow. It will produce $1.79 million in free cash flow next year and it will grow at 1.19% each year thereafter forever. The second line of business, run by Division B, is risky. It expects to generate a cash flow of $3.03 million next year and will grow at a rate of 2.03%. Currently, the total market value of DPL is $116.8 million. The term structure of interest rates is flat at 3.44%. Show two decimal places for all your answers. (a) What is the dollar value of Division B? million (b) What is the cost of capital for Division B (in %)? % (c) Assume the company is planning on making an investment which will improve Division B's profitability. This project requires an initial investment of $6.8 million a year from now, and will increase cash flow by $0.96 million starting in year 2, as well as all future cash flows, so that their growth rate after year 2…Suppose Alcatel-Lucent has an equity cost of capital of 10.3%, market capitalization of $9.36 billion, and an enterprise value of $13 billion. Assume that Alcatel-Lucent's debt cost of capital is 7.3%, its marginal tax rate is 34%, the WACC is 8.7650%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. The expected free cash flow, levered value, and debt capacity are as follows: Thus, the NPV of the project calculated using the WACC method is $182.73 million - $100 million = $82.73 million. a. What is Alcatel-Lucent's unlevered cost of capital? b. What is the unlevered value of the project? c. What are the interest tax shields from the project? What is their present value? d. Show that the APV of Alcatel-Lucent's project matches the value computed using the WACC method. a. What is Alcatel-Lucent's unlevered cost of capital? Alcatel-Lucent's unlevered cost of capital is%. (Round to four decimal places.) Data table (Click on the following icon in…
- a) One of the touted advantages of an ERM system is the stabilization of revenuethat results in shareholders valuing the business highly on the markets. Assumea firm has operating free cash flows of K300 million, which is expected to grow at13% for four years. After four years, it will return to a normal growth rate of 8%.Assuming that the weighted average cost of capital is 12%. Calculate the valueof the firm. b) A project has a worked out IRR of 15%. Would you advise the companyto undertake this project at its current WACC? Give reasons for youranswer.You are going to value Lauryn's Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.8, a debt-to-equity ratio of .3, and a tax rate of 21 percent. Assume a risk-free rate of 3 percent and a market risk premium of 9 percent. Lauryn's Doll Co. had EBIT last year of $60 million, which is net of a depreciation expense of $6 million. In addition, Lauryn's made $5.55 million in capital expenditures and increased net working capital by $2.3 million. Assume the FCF is expected to grow at a rate of 3 percent into perpetuity. What is the value of the firm? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)A firm has decided that its optimal capital structure is 100% equity-financed. It perceives its optimal dividend policy to be a 60% payout ratio. Asset turnover is sales/assets = 0.6, the profit margin is 10%, and the firm has a target growth rate of 3%. a-1. Calculate the sustainable growth rate. (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) a-2. Is the firm’s target growth rate consistent with its other goals? b. If the firm’s target growth rate is not consistent with its other goals, what would asset turnover need to be to achieve its goals? (Do not round intermediate calculations. Round your answer to 3 decimal places.) c. If the firm’s target growth rate is not consistent with its other goals, how high would the profit margin need to be to achieve its goals? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)