Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.60 (given its target capital structure). Vandell has $8.57 million in debt that trades at par and pays a 7.4% interest rate. Vandell’s free cash flow (FCF0) is $1 million per year and is expected to grow at a constant

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 8P

See similar textbooks

Similar questions

Ogier Incorporated currently has $800 million in sales, which are projected to grow by 10% in Year 1 and by 5% in Year 2. Its operating profitability ratio (OP) is 10%, and its capital requirement ratio (CR) is 80%? What are the projected sales in Years 1 and 2? What are the projected amounts of net operating profit after taxes (NOPAT) for Years 1 and 2? What are the projected amounts of total net operating capital (OpCap) for Years 1 and 2? What is the projected FCF for Year 2?
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Vandell has $11.22 million in debt that trades at par and pays a 7.2% interest rate. Vandell's free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Both Vandell and Hastings pay a 30% combined federal and state tax rate. The risk-free rate of interest is 4% and the market risk premium is 6%. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.6 million, $2.9 million, $3.4 million, and $4.00 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell's $11.22 million in debt (which has a 7.2% interest rate) and raise additional debt financing at the time of the…
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow FCF0 is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5% and the market risk premium is 6%. Hastings’s first step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.) What is the current intrinsic value of Vandell’s stock
Howell Corporation is interested in acquiring Burns Industries. Burns has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Burns has $8.33 million in debt that trades at par and pays a 7% interest rate. Burns’ free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Burns pays a 25% combined federal-plus-state tax rate, the same rate paid by Howell. The risk-free rate of interest is 6%, and the market risk premium is 7%. Hasting’s first step is to estimate the current intrinsic value of Burns. A. What is Burns’ cost of equity? Do not round intermediate calculations. Round to two decimal places. _______% B. What is its weighted average cost of capital? Do not round intermediate calculations. Round to two decimal places. ________% C. What is Burns’ intrinsic value of operations? Do not round intermediate calculations. Round to two decimal places.…
XYZ corporation is expecting free cash flow of $100 million next year, and it will grow by 3% per year indefinitely afterward. XYZ’s discount rate is 12%. XYZ has $300 million worth of long term bonds outstanding, and 10 million shares of stock outstanding. What is a fair value for a share of XYZ? Do not include the $ sign and answer to the nearest $0.01.
An analyst is trying to estimate the intrinsic value of the stock of ATR Kim Eng. The analyst estimates that ATR Kim Eng’s free cash flow during the next year will be P25 million. The analyst also estimates that the company’s free cash flow will increase at a constant rate of 7% a year and that the company’s WACC is 10%. ATR Kim Eng has P200 million of long-term debt and preferred stock and 30 million outstanding shares of common stock. What is the estimated per-share price of ATR Kim Eng’s common stock? Group of answer choices P21.11 P27.78 P34.43 P8.33
An analyst is trying to estimate the intrinsic value of the stock of ATR Kim Eng. The analyst estimates that ATR Kim Eng's free cash flow during the next year will be P25 million. The analyst also estimates that the company's free cash flow will increase at a constant rate of 7% a year and that the company's WACC is 10%. ATR Kim Eng has P200 million of long- term debt and preferred stock and 30 million outstanding shares of common stock. What is the estimated per-share price of ATR Kim Eng's common stock? O P27.78 O P8.33 O P34.43 O P21.11
An analyst is trying to estimate the intrinsic value of the stock of ATR Kim Eng. The analyst estimates that ATR Kim Eng’s free cash flow during the next year will be P25 million. The analyst also estimates that the company’s free cash flow will increase at a constant rate of 7% a year and that the company’s WACC is 10%. ATR Kim Eng has P200 million of long-term debt and preferred stock and 30 million outstanding shares of common stock. In the Philippine stock exchange, ATR Kim Eng's common stock is traded at P30.00. What can be said of the stock price's condition? a. undervalued/underpriced b. overvalued/overpriced c. oversold d. in equillibrium
XYZ has an expected Free Cash Flow of $109M next year and will remain the same in perpetuity. It has a WACC of 8%. The Company has Short term investment amounting to $104M. The Company has Preferred stock of $50M, Debt of $97M and 110M of common stock outstanding. What is the intrinsic value of its common stock?
Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.44. For each year into the indefinite future, Remex's free cash flow is expected to equal $26 million. Remex is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 25% debt-equity ratio after the change, and it will maintain this debt-equity ratio forever. Assume that Remex's debt cost of capital will be 6.37%. Remex faces a corporate tax rate of 15%. Except for the corporate tax rate of 15%, there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is 4.9%, and the expected return on the market is 10.78%. a. Using the information provided, fill in the table below. b. Using the information provided and your calculations in part (a), determine the value of the tax shield acquired by Remex if it changes its capital structure in the way it is…
Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and has no other assets or opportunities. Suppose the appropriate discount rate for Kohwe's future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is Kohwe's share price today? Suppose Kohwe borrows the $50 million instead. The finn will pay interest only on this loan each year, and maintain an outstanding balance of $40 million on the loan. Suppose that Kohwe's corporate tax rate is 35%, and expected free cash flows are still $9 million each year. c. What is Kohwe's share price today if the investment is financed with debt? Now suppose that with leverage, Kohwe's expected free cash flows wiH decline to $8 million per year due…
Demon Corporation expects to generate free-cash flows of $200,000 per year for each of the next five years. Beyond the five years and into perpetuity, free cash flows are expected to grow at a constant rate of 5 percent per year forever. The firm's weighted average cost of capital is 15 percent. The firm’s market value of debt is $500,000 and there is no preferred stock. What is the market value of Demon Cop. equity?