Question

In: Finance

A firm is expected to grow in perpetuity at a rate of 5%. If the current...

A firm is expected to grow in perpetuity at a rate of 5%. If the current year free cash flow is 15 million, the cost of equity is 16%, after-tax cost of debt is 9% and the target debt to equityratiois0.25,thenwhatisthevalueofthisfirmtodayif the tax rate is 20%?

Expert Solution

Growth rate = 5%

FCF Current year = 15 Million

Debt to equity ratio = 0.25

Total capital = Debt + Equity

Debt = 0.25 * Equity

Total capital = 0.25 Equity + Equity

= 1.25 x Equity

Debt ratio = Debt / Total capital

= 0.25 / 1.25

= 20%

Equity ratio = 100% - 20% = 80%

Cost of equity = 16%

After tax cost of debt = 9%

WACC = Debt ratio * After tax cost of debt + Equity ratio * Cost of equity

= 0.20 * 0.09 + 0.80 * 0.16

= 14.60%

Value of the firm = Current FCF * (1 + Growth rate) / (WACC - Growth rate)

= 15000000 * (1 + 0.05) / (0.1460 - 0.05)

= 164062500

jeff jeffy answered 2 years ago

A firm is expected to pay a dividend of $10 next year and afterwards dividends are expected to grow at 3% per annum in perpetuity.

A firm is expected to pay a dividend of $10 next year and afterwards dividends are expected to grow at 3% per annum in perpetuity. Assume the firm's required rate of return is 5%. a. What should be its stock price?b. A second firm that is expected to pay also a dividend of $10 next year has the same stock price as the first. However, after analyzing the financial statements of this second firm you realize that its dividends are likely...

The dividends of XYX Ltd are expected to grow at a rate of 5%, 10% and...

The dividends of XYX Ltd are expected to grow at a rate of 5%, 10% and 15% p.a. during years 1 through 3 respectively. After that, the dividends are expected to grow at a long-run rate of 5% p.a. forever. The company’s current dividend per share is $1.50 and the required rate of return on the shares is 12% p.a. Based on this information, the current price should be closest to:

Firm AAA's earnings and dividends are expected to grow by a rate of 0.04 a year....

Firm AAA's earnings and dividends are expected to grow by a rate of 0.04 a year. This growth will stop after year 4. In year 5 and later, it will pay out all earnings as dividends. Assume next year's dividend is 2, the cost of capital is 0.08, and next year's EPS is 12. What is AAA's stock price today? Round your answer to 2 decimal places.

AT&T just paid a $5 dividend, dividends are expected to grow at a 10% rate for...

AT&T just paid a $5 dividend, dividends are expected to grow at a 10% rate for the next three years and at a 5% rate after that. What is the value of the stock if investors require a 13% return to purchase the stock?

TCU Corp. pays a current dividend of $5 per year, which is expected to grow by...

TCU Corp. pays a current dividend of $5 per year, which is expected to grow by 10% the next two years, then by 6% for the following two years, and from year 5 and on maintain a 3% constant growth. The discount rate is 8%. Calculate the current price of one share of TCU Corp.

Voila is an all‐equity firm with pre‐tax earnings expected to be $800,000 in perpetuity. The firm...

Voila is an all‐equity firm with pre‐tax earnings expected to be $800,000 in perpetuity. The firm has 100,000 shares outstanding. The cost of capital is 20% and the firm faces a 40% tax on all corporate earnings. Voila is considering a major expansion of its facilities, which will require an initial outlay of $750,000 and is expected to produce additional annual pre‐tax earnings of $250,000 per year in perpetuity. Management considers the expansion to have the same risk as the...

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5%...

3. The expected dividend next year is $1.30 and dividends are expected to grow at 5% forever. What is the value of this promised dividend stream if the discount rate is a) 8% b) 5% c) 3%

(a): The dividends that a firm pays to its stockholders are expected to grow at 3%...

(a): The dividends that a firm pays to its stockholders are expected to grow at 3% per quarter for the next four quarters. From t=4 onwards, i.e. from the beginning of the fifth quarter the growth rate in dividends will drop to 1.5% per quarter, and the firm expects to be able to sustain it at this level. Assuming that the market capitalization rate is 2.5% per quarter, work out the price of the firm’s stock assuming that the dividend...

Tool Manufacturing has an expected EBIT of RM63,000 in perpetuity and a tax rate of 21...

Tool Manufacturing has an expected EBIT of RM63,000 in perpetuity and a tax rate of 21 percent. The firm has RM115,000 in outstanding debt at an interest rate of 7 percent and its unlevered cost of capital is 12 percent. What is the value of the company according to MM Proposition I with taxes? pls do not write in 2 3 line explain formulas and do it pls

A stock is expected to grow at a rate of 22% for the next three years....

A stock is expected to grow at a rate of 22% for the next three years. A recent dividend paid was $1.35 per share. After three years, the stock is expected to grow at a constant rate of 12% per year. If the minimum acceptable rate of return is 14%, what is the current expected price? Show all work.