a) Company U will have a FCF of $50,000 in next year. The FCF is expected...

a) Company U will have a FCF of $50,000 in next year. The FCF is expected to decrease by 30 percent year after next year. The FCF will then increase by 20% in third and fourth year, and will keep a constant growth rate of 3% forever. The market value of debt is $220,000, and market value of preferred shares is $80,000. If the required return on the stock is 11 percent, WACC is 9 percent, and the number of share is 18,000, what will a share of stock sell for today?

b) Assume that interest rate is 13 %. Consider the following independent projects:

	Project A	Project B
Year 0	-$14,000	-$12,500
Year 1	+$2,000	0
Year 2	+$15,000	+$10,000
Year 3	+$3,000	+$10,000
Year 4	+$3,000	0
Year 5	+$7,000	0
Year 6	+$8,000	0
Year 7	-$15,000	+$10,000

i) What is the discounted payback for Project A and Project B? Based on discounted payback rule (benchmark of 3 years), what is your decision?

ii) What is the IRR for Project A and Project B? Based on IRR, what is your decision?

Expert Solution

i) Based on discounted payback period, both projects can be accepted, as their payack period < Benchmark period (3 years)

ii) Based on IRR rule , both projects can be accepted,as IRR> Rate (13%)

Formulae

jeff jeffy answered 3 years ago

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