Question

Prokter and Gramble​ (PKGR) has historically maintained a​ debt-equity ratio of approximately

0.24

.

Its current stock price is

$ 55

per​ share, with

2.6

billion shares outstanding. The firm enjoys very stable demand for its​ products, and consequently it has a low equity beta of

0.6

and can borrow at

4.1

​%,

just 20 basis points over the​ risk-free rate of

3.9

​%.

The expected return of the market is

9.6

​%,

and​ PKGR's tax rate is

25

​%.

a. This​ year, PKGR is expected to have free cash flows of

​$6.6

billion. What constant expected growth rate of free cash flow is consistent with its current stock​ price?

b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher​ debt-equity ratio of

0.6

​,

it believes its borrowing costs will rise only slightly to

4.4

​%.

If PKGR announces that it will raise its​ debt-equity ratio to

0.6

through a leveraged​ recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.

a. This​ year, PKGR is expected to have free cash flows of

​$6.6

billion. What constant expected growth rate of free cash flow is consistent with its current stock​ price?

The constant expected growth rate of free cash flow is consistent with its current stock price is

nothing

​%.

​ (Round to two decimal​ places.)

b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher​ debt-equity ratio of

0.6

​,

it believes its borrowing costs will rise only slightly to

4.4

​%.

If PKGR announces that it will raise its​ debt-equity ratio to

0.6

through a leveraged​ recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.

Increase​ (or decrease) in stock price is

​$ nothing

.

​(Round to the nearest cent. Use a minus sign to indicate a negative​ number.)

Answer 1

As nothing is mentioned, i have followed book, in which values are rounded to 2 digits.