Question

Shine Industries capital structure contains 40% debt and 60% equity. Its after-tax cost of debt is 10% and investors require an 19% return on the firm's common stock. Shine has no preferred stock outstanding and the value of its debt, VD, is 65,000,000. It has 8,250,000 shares of common stock outstanding. The firm's free cash flow (FCF) in the immediate past year was $10,000,000 and it is expected to grow at a compound annual rate of 13% over the next four years, beyond which it will grow at 6% annually forever.

a.	Calculate Shine's weighted average cost of capital (WACC).
b.	Calculate the firm's total enterprise value, VF, today.
c.	Calculate the total share value and the per-share value, P0, of Shine's common stock.

Answer 1

). Calculating Weighted Cost of Capital (WACC):-

WACC= (Weight of Debt)(After-tax Cost of Debt) + (Weight of Equity)(Cost of Equity)

WACC = (0.40)(10%) + (0.60)(19%)

WACC = 4% + 11.40%

WACC = 15.40%

b). FCF past year =$10,000,000

Growth rate for the next 4 years (g)= 13%

Growth rate beyonf those years (g1) = 6% forever

Calculating the firm's Enterprise Value, VF, Today:-

VF = 9,792,027.73 + 9588,380.71 + 9388968.98 + 9193,704.46 + 103,673,688.54

VF = $141,636,770.42

So, the firm's Enterprise Value, VF, Today is $141,636,770.42

c).

Enterprise Value = Share Value + Value of Debt

$141,636,770.42 = Share Value + $65,000,000

Share Value = $76,636,770.423

So, Firm's share value is $76,636,770.42

No of share outstanding = 8250,000

Share value per share = Share Value/No of share outstanding

=$76,636,770.42/8250,000

=$9.29 per share