Question
In: Accounting
AFM Co. has a market value-based D/V ratio of 1/3. The expected return on the company’s...
AFM Co. has a market value-based D/V ratio of 1/3. The expected return on the company’s unlevered equity is 20%, and the pretax cost of debt is 10%. Sales for the company are expected to remain stable indefinitely at $25 million. Costs amount to 60% of sales. The corporate tax rate is 30%, and the company distributes all its earnings as dividends at the end of each year. The company’s debt policy is to maintain a constant market value-based D/V ratio.
(a) If the company were all equity financed, how much would it be worth?
(b) What is the expected rate of return on the firm’s levered equity?
(c) First, use the after-tax WACC approach to calculate the value of the entire company (V). Then compute the value of the company’s equity (E) and the value of the company’s debt (D).
(d) Use the APV approach to compute the value of the company. You will need to use some of the answers from part (c).
Solutions
ekkarill92 answered 2 years agoRelated Solutions
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The Home
Depot, Inc. Cash Flow
All
numbers in thousands
Period
Ending
1/29/17
1/31/16
Net
Income
7,957,000
7,009,000
Operating
Activities, Cash Flows Provided By or Used In
Depreciation
1,973,000
1,863,000
Adjustments To Net Income
267,000
100,000
Changes
In Accounts Receivables
-138,000
-181,000
Changes
In Liabilities
654,000
1,151,000
Changes
In Inventories
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-546,000
Changes
In Other Operating Activities
-161,000
-23,000
Total
Cash Flow From Operating Activities...
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A stock currently has a market value of $10. The risk-free rate of return is 3%....
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of return is 3%. In one year, the stock is expected to sell for
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price of $12? (6 points)
b) If the twelve-month call option is traded at $1.2, Recommend
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