Black Hills Co. expects a free cash flow of $8,000,000 next year that will grow at...

Black Hills Co. expects a free cash flow of $8,000,000 next year that will grow at 5% forever. The company currently has no debt and no preferred stock, and its WACC is 10%. The company plans to take some debt of $64,000,000 to repurchase share, but only make interest payments. Black Hills Co. faces a 40% federal-plus-state tax rate, and there are 400,000 shares of stock outstanding.

a. What is the market value of the unlevered firm? (4 Points)

b. What is the share price of unlevered firm? (4 Points)

c. What is the interest tax shield? (4 Points)

d. What is the levered firm value? (4 Points)

e. What is the share price when the firm announces their share repurchase plan? (4 Points)

f. Show the levered firm’s balance sheet. (4 Points)

g. How many shares can the firm repurchase? (4 Points)

Expert Solution

Black Hills Co.
Next Year Cash flow =CF1=	$ 8,000,000
Perpetual FCF growth rate =	5%
WACC =k=10%
PV of FCF =8,000,000/(10%-5%)=	$ 160,000,000
So Market value of Unlevered Firm =	$ 160,000,000	Ans a.
No of shares Outstanding	$ 400,000
Share price of Unlevered firm =$160M/400,000=	$ 400	Ans b.

New Debt to be raised	$ 64,000,000
Tax rate	40%
perpetual Interest Tax shield=Debt*Tax rate=	$ 25,600,000	Ans c.

Levered Firm Value =Unlevered firm value+perpetual Interest Tax shield=	$ 185,600,000	Ans d.
Value of Equity in levered firm =$185.6M-$64M=	$ 121,600,000

The share price will not change with the
announcement of share repurchase, so
share Price during announcement of share
repurchase plan =	$ 400	Ans e.

Debt Raised for Levered firm =	$ 64,000,000
No of Share repurchased =$64M/400=	160,000.00	And f,

Ans g.
Balance sheet
Levered Firm
Particulars	Amt $
Total Assets	$ 185,600,000
Liabilities & Equity
Debt	$ 64,000,000
Equity	$ 121,600,000
Total Liabilities & Equity	$ 185,600,000

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