Question

Petronas is planning to raise capital by issuing additional common stocks for investment in Saudi Arabia. The management needs to determine the proper share price to be charged before offering to its existing shareholders. You are required to measure the reasonable price charged on each stock based on the following information:

• The appropriate cost of equity is 11 percent per annum.
• The company has an existing USDmillion short term debt, USD500,000 long-term debt, and USD400,000 preferred stock.
• The estimated free cash flow over the next 5 years for 2019 is USD200,000; 2020 is USD250,000; 2021 is USD310,000; 2022 is 350,000 and 2023 is USD390,000.
• Beyond 2023 to infinity, the company expects its free cash flow to grow by 3 percent annually.

1. Based on the free cash flow given above, you are required to estimate the entire company value for Caltex petroleum

2. Based on the answer in (a), determine the common stock value for Caltex Petroleum Explain your answer.  

3. Propose to the management, the reasonable price charged on each share if the management plans to issue 300,000 shares. Explain your answer.

4. Leverage results from the use of fixed-cost assets or funds magnify returns to the firm’s owners. You are required to discuss the relationship between operating, financial, and total (combined) leverage.           

Answer 1

GIVEN THAT :-

According to the question we have a values and based on the values taking the table as below,

	2019	2020	2021	2022	2023
FCF	200000	250000	310000	350000	390000
TERMINAL VALUE	-	-	-	-	5021250
FCF	200000	250000	310000	350000	5411250
WACC	11%
FCFF(g)	3%

now

TO FIND:-a.Based on the free cash flow given above, you are required to estimate the entire company value for Caltex petroleum

now finding the value of the frim

so for finding the value of frim we have a formula stated below

FCF2019/(1+WACC)^1+FCF2020+(1+WACC)^2+......+FCF2023/(1+WACC)^5+FCF2023*1+G/(1+WACC)5*(K-G)

so substituting all the values from the above and solving we get the

value of from = 4051624

TO FIND :-b)Based on the answer in (a), determine the common stock value for Caltex Petroleum Explain your answer.  

now we have the value as the

value of the firm = 4051624

value of debt = 900000

value of preferred stock = 400000

we have the value of equity = 2751624

so the common dtock vlue fro the caltex petroleum is 2751624

TO FIND :-c)Propose to the management, the reasonable price charged on each share if the management plans to issue 300,000 shares. Explain your answer.

for finding the estimated value of the share

we have formula

=>value of common stock/ no of shares of common stock

substituting the values from the above as we get

==2751624/300000

= 9.17

=9 $ (approx nearest doller)

estimated value of the share = 9 $ per share

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