Question

In: Finance

1. Starbucks had a FCFE/share at the end of last year of $2.72. For this year,...

1.

Starbucks had a FCFE/share at the end of last year of $2.72. For this year, growth is expected to be -9.89%, for years 2 and 3 growth is expected to be 9.95, and then 1.13 thereafter. If the correct cost of equity is 4.63, what is the current price?

2.

Starbucks' FCFF (free cash flow to the firm) is $2.54/share. Using the Gordon Growth model with FCFF, find the value of the firm given constant growth of 1.98%, a weight in equity of 89.0%, cost of equity of 7.91%, after-tax cost of debt of 5.10%.

Solutions

Expert Solution

2).

Weight in Debt = 1-Weight in Equity

= 1-0.89

= 0.11

WACC = Cost of Equity*Weight of Equity + After tax cost of Debt*Weight of Debt

= 7.91*0.89 + 5.10*0.11

= 7.0399 + 0.561

= 7.60%

According to Gordon growth model,

Value of Firm = FCFF0*(1+g)/(r-g)

Where, g is constant growth rate

r is required return

Value of Firm = $2.54*(1+0.0198)/(0.076-0.0198)

= 2.588006/0.0571

= $45.32

jeff jeffy answered 3 years ago
Next > < Previous

Related Solutions

A company’s last dividend was $1.50 per share at the end of the year. For the...
A company’s last dividend was $1.50 per share at the end of the year. For the next three years, the growth rate is expected to be 23% per year, after which the growth rate is expected to continue at a constant rate of 7% per share. Shareholders require 12% rate of return. What would you be willing to pay for this stock today? Show the answer by hand not using excel.
ABC Paper stock was $36per share at the end of last year. Since then, it paid...
ABC Paper stock was $36per share at the end of last year. Since then, it paid a $1.50 per share dividend in the last year. The stock price is currently $35. Suppose you own 300 shares of ABC Paper. Which of the following statements is (are) correct?(x)Your dollar return on ABC Paper stock was $150 for the year.(y)Your percent return on ABC Paper stock was 1.39 percent for the year.(z)If you had owned more stock then you would have experienced...
Halliford Corporation expects to have earnings this coming year of $ 2.72 per share. Halliford plans...
Halliford Corporation expects to have earnings this coming year of $ 2.72 per share. Halliford plans to retain all of its earnings for the next two years. For the subsequent two​ years, the firm will retain 53 % of its earnings. It will then retain 20 % of its earnings from that point onward. Each​ year, retained earnings will be invested in new projects with an expected return of 24.62 % per year. Any earnings that are not retained will...
Last year a company had sales of $800,000, operating costs of 70%, and year-end assets of...
Last year a company had sales of $800,000, operating costs of 70%, and year-end assets of $1,500,000. The debt-to-total-assets ratio was 20%, the interest rate on the debt was 10.00%, and the tax rate was 21%. The new CFO wants to see how the ROE would have been affected if the firm had used a 30% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant....
At the end of last year, June, a 30% partner in the four-person BJJM Partnership, had...
At the end of last year, June, a 30% partner in the four-person BJJM Partnership, had an outside basis of $75,000 in the partnership, including a $60,000 share of partnership debt. June’s share of the partnership’s § 1245 recapture potential was $40,000. All parties use the calendar year. Describe the income tax consequences to June in both of the following independent situations that take place in the current year. a. On the first day of the tax year, June sells...
Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of...
Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 25%, the interest rate on the debt was 8.2%, and the firm's tax rate was 38%. The new CFO wants to see how the ROE would have been affected if the firm had used a 35% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain...
Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of...
Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 25%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain...
Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of...
Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $163,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain...
Company «Rho», during the last fiscal year, had book value per share €100, earnings per share...
Company «Rho», during the last fiscal year, had book value per share €100, earnings per share €10 and distributed €2 dividends per share. For the next 3 years the firm is expected to have a stable payout ratio and stable return on equity. From the 3rd year and onwards the firm is expected to distribute 50% of its earnings and to have a return on equity of 5%. The beta coefficient of the firm is 1.5, the return of the...
9. Last year Russell Corp. had sales of $303,225, operating costs of $267,500, and year-end assets...
9. Last year Russell Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT