Caltex Petroleum is planning to raise capital by issuing additional common stocks for investment in Saudi...

Caltex Petroleum is planning to raise capital by issuing additional common stocks for investment in Saudi Arabia. The management needs to determine the proper share price to be charged before offering to its existing shareholders. You are required to measure the reasonable price charged on each stock based on the following information:

The appropriate cost of equity is 11 percent per annum.
The company has an existing USD 1million short term debt, USD500,000 long-term debt, and USD400,000 preferred stock.
The estimated free cash flow over the next 5 years for 2019 is USD200,000; 2020 is USD250,000; 2021 is USD310,000; 2022 is 350,000 and 2023 is USD390,000.
Beyond 2023 to infinity, the company expects its free cash flow to grow by 3 percent annually.

Based on the free cash flow given above, you are required to estimate the entire company value for Caltex petroleum

Based on the answer in (a), determine the common stock value for Caltex Petroleum Explain your answer.

Propose to the management, the reasonable price charged on each share if the management plans to issue 300,000 shares. Explain your answer.

Leverage results from the use of fixed-cost assets or funds magnify returns to the firm’s owners. You are required to discuss the relationship between operating, financial, and total (combined) leverage.

Solutions

Expert Solution

Calculation of Common Stock Value for Caltex Petroleum

Total PV of Free Cash Flows

Year	Cash Flows	Disc Rate @ 11%	PV
2019	$2,00,000	0.900900901	$1,80,180
2020	$2,50,000	0.811622433	$2,02,906
2021	$3,10,000	0.731191381	$2,26,669
2022	$3,50,000	0.658730974	$2,30,556
2023	$3,90,000	0.593451328	$2,31,446
Beyond 2023	$50,21,250	0.593451328	$29,79,867
	(390000+3%/(0.11-0.03)
PV of Free Cash Flows			$40,51,624

Total Value	$40,51,624
Less: Value of Preferred Stock	-$4,00,000
Less: Value of Long Term Debt	-$5,00,000
Less: Value of Short Term Debt	-$10,00,000

Value of Common Stock	$21,51,624

Cacluation of Reasonbale Price to issue Shares

Value of Common Stock	$21,51,624

No of Shares	30000

Price	$72

ekkarill92 answered 1 year ago

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