Question
In: Finance
Year 0 1 Revenue 600.00 Fixed costs 100.00 Variable costs 200.00 Additional investment in NWC 10.00...
| Year | 0 | 1 | |
| Revenue | 600.00 | ||
| Fixed costs | 100.00 | ||
| Variable costs | 200.00 | ||
| Additional investment in NWC | 10.00 | ||
| Additional investment in operating long-term assets | 70.00 | ||
| Depreciation | 60.00 | ||
| Interest expenses | 35.00 | ||
| Newly issued debt | 25.00 | ||
| Principle repayments | 15.00 | ||
| Tax rate | 0.40 | ||
| Market value of the firm: | |||
| Price per share | No. of shares | Market value | |
| Short-term debt | 100.00 | ||
| Long-term debt | 600.00 | ||
| Preferred stock | 10.00 | 10 | 100.00 |
| Common stock, equity | 18.00 | 100 | 1,800.00 |
| Total | 2,600.00 | ||
| Cost of equity (Rs) | 0.1500 |
| Growth rate per year from year 1 through year 5 | 0.10 |
| Growth rate after year 5 | 0.07 |
What is the price per share according to the equity free cash flow model?
Select one:
a. $18.29
b. $10.98
c. $15.51
d. $20.87
e. $12.33
Solutions
Expert Solution
Given annual details:
Revenue = 600; Fixec cost = 100; Variable cost = 200; Depreciation = 60; Interest =35;
Earnings before tax and after depreciation = Revenue - Fixed cost - Variable cost -Interest - Depreciation = 600-100-200-35-60 =205. Tax @40% on 205 = 205*(0.40) = 82.
Therefore, Earnings afrter tax = 205-82 = 123
Add Depreciation ( since this is cash flow, depreciation will not have any cashflow impact) = 60
Hence, cashflow per annum = 123+60 = 183.
Net cashflow per annum = 183- 10 (Additional Working capital required) = 173
Value of firm = Present value of Future discounted cashflows.
= Year1 cashflow * Present value factor of 10% for 1st 5 years + Year 6 cash flow*P.V factor of year6 / (cost of equity - growth rate till perpetuity)
=173 * 3.791 (based on present value cumulative table) + [173 * 0.564(year 6 PV as per PV table) / (0.15 - 0.07)]
=655.84 + [97.572 / (0.08)]
=655.84+1219.65
=1875.49
Value of Firm = 1875.49
Less: Long term operating investments = 70
Less : Principal repayments = 15
Add: New debt raised = 25
Therefore adjusted value of firm = 1875.49 - 70 - 15 + 25 = 1815.49
Less : Short term and Long term debt = 100+600 = 700
Less : Preference stock = 100
= Total value of equity = 1815.49-700-100 = 1015.49
Therefore, value per share = 1015.49/100 = $ 10.15
Nearest option to this is $ 10.98.
jeff jeffy answered 2 years agoRelated Solutions
Year 0 1 Revenue 600.00 Fixed costs 100.00 Variable costs 200.00 Additional investment in NWC 10.00...
Year
0
1
Revenue
600.00
Fixed costs
100.00
Variable costs
200.00
Additional investment in NWC
10.00
Additional investment in operating long-term assets
70.00
Depreciation
60.00
Interest expenses
35.00
Newly issued debt
25.00
Principle repayments
15.00
Tax rate
0.40
Market value of the firm:
Price per share
No. of shares
Market value
Short-term debt
100.00
Long-term debt
600.00
Preferred stock
10.00
10
100.00
Common stock, equity
18.00
100
1,800.00
Total
2,600.00
Cost of equity (Rs)
0.1500
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