Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 4, Problem 25PS
DCF and
PP has 7 million shares outstanding. The cost of capital is 9%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25. Also, ignore taxes.
- a. What is the ending 2016 value of one PP share? Assume that oil prices are expected to fall to $60 per barrel in 2017, $55 per barrel in 2018, and $50 per barrel in 2019. After 2019, assume a long-term trend of oil-price increases at 5% per year.
- b. What is PP’s EPS/P ratio and why is it not equal to the 9% cost of capital?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.83 million barrels per year in 2018, but production is declining at 6% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.30 per barrel. The average oil price was $65.30 per barrel in 2018.PP has 7.3 million shares outstanding. The cost of capital is 8%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25.30. Also, ignore taxes.a. Assume that oil prices are expected to fall to $60.30 per barrel in 2019, $55.30 per barrel in 2020, and $50.30 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 4% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b-1. What is PP’s EPS/P ratio? (Do not round intermediate calculations.…
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.83 million barrels per year in 2018, but production is declining at 6% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.30 per barrel. The average oil price was $65.30 per barrel in 2018.PP has 7.3 million shares outstanding. The cost of capital is 8%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25.30. Also, ignore taxes.a. Assume that oil prices are expected to fall to $60.30 per barrel in 2019, $55.30 per barrel in 2020, and $50.30 per barrel in 2021. After 2021, assume a long-term trend of oil-price increases at 4% per year. What is the ending 2018 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b-1. What is PP’s EPS/P ratio? (Do not round intermediate calculations.…
Longhorn, Incorporated, has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 55 percent and the tax rate is 23 percent. The required return on the firm’s levered equity is 14 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year Cash Flow 0 −$ 18,400,000 1 5,740,000 2 9,540,000 3 8,840,000 The company has arranged a debt issue of $9.42 million to partially finance the expansion. Under the loan, the company would pay interest of 9 percent at the end of each year on the outstanding balance at the beginning of the year. The company also would make year-end principal payments of $3,140,000 per year, completely retiring the issue by the end of the third year. What is the APV of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
Chapter 4 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 4 - True/false True or false? a. All stocks in an...Ch. 4 - Dividend discount model Respond briefly to the...Ch. 4 - Dividend discount model Company X is expected to...Ch. 4 - Dividend discount model Company Y does not plow...Ch. 4 - Constant-growth DCF model Company Zs earnings and...Ch. 4 - Dividend discount model Company Z-prime is like Z...Ch. 4 - Dividend discount model If company Z (see Problem...Ch. 4 - Prob. 8PSCh. 4 - Prob. 9PSCh. 4 - Free cash flow Under what conditions does r, a...
Ch. 4 - Prob. 11PSCh. 4 - Prob. 12PSCh. 4 - Horizon value Suppose the horizon date is set at a...Ch. 4 - Stock quotes Go to finance.yahoo.com and get...Ch. 4 - Two-stage DCF model Consider the following three...Ch. 4 - Constant-growth DCF model Pharmecology just paid...Ch. 4 - Two-stage DCF model Company Qs current return on...Ch. 4 - Cost of equity capital Each of the following...Ch. 4 - Growth opportunities Alpha Corps earnings and...Ch. 4 - Prob. 23PSCh. 4 - Two-stage DCF model Compost Science Inc. (CSI) is...Ch. 4 - DCF and free cash flow Permian Partners (PP)...Ch. 4 - DCF and free cash flow Construct a new version of...Ch. 4 - Valuing a business Mexican Motors market cap is...Ch. 4 - Valuing Tree cash flow Phoenix Corp. faltered in...Ch. 4 - Constant-growth DCF formula The constant-growth...Ch. 4 - DCF valuation Portfolio managers are frequently...Ch. 4 - Valuing a business Construct a new version of...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Permian Partners (PP) produces from aging oil fields in west Texas. Production is currently 1.94 million barrels per year, but is declining at 5% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.40 per barrel. The current oil price is $66.40 per barrel. PP has 8.4 million shares outstanding. The cost of equity is 7%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $26.40. Also, ignore taxes. a.Assume that oil prices are expected to fall to $61.40 per barrel next year, and to $56.40 and $51.40 per barrel in the two years following. After that decrease, assume a long-term trend of oil-price increases at 3% per year. What is the value of one PP share? b-1.What is PP’s E/P ratio? b-2.Is it equal to the 7% cost of capital?arrow_forwardDyrdek Enterprises has equity with a market value of $1.8 million and the market value of debt is $3.55 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.6 percent. The new project will cost $2.20 million today and provide annual cash flows of $576,000 for the next 6 years. The company's cost of equity is 11.07 percent and the pretax cost of debt is 4.88 percent. The tax rate is 21 percent. What is the project's NPV?arrow_forwardDyrdek Enterprises has equity with a market value of $12.6 million and the market value of debt is $4.45 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.9 percent. The new project will cost $2.56 million today and provide annual cash flows of $666,000 for the next 6 years. The company's cost of equity is 11.79 percent and the pretax cost of debt is 5.06 percent. The tax rate is 24 percent. What is the project's NPV? Multiple Choice $208,195 $194,561 $536,049 $183,363 $364,858arrow_forward
- **Please solve using Excel and show formulas.** Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.97 million barrels per year in 2018, and it will be stable for the foreseeable future. Costs of production, transportation, and administration add up to $26.70 per barrel. The average oil price was $66.7 per barrel in 2018, and it will not change in the future. PP has 8.7 million shares outstanding. The cost of capital is 11%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $26.70. Also, ignore taxes. Given more time you would compute the net income for 2019, which is 62,744,500. Assume that this net income will remain constant for the foreseeable future (there will be no growth in the net Income). Question: What is the ending 2018 value of one PP share? Multiple Choice $71.9 $64.1 $68.6 $70.9 $65.6arrow_forwardHarbor Co. has produced boat supplies for over 20 years. The company currently has a debt-equity ratio of 65 percent and the tax rate is 24 percent. The required return on the firm's levered equity is 13 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year 0 1 2 3 Cash Flow -$ 19,800,000 5,900,000 9,700,000 9,000,000 The company has arranged a debt issue of $9.9 million to partially finance the expansion. Under the loan, the company would pay interest of 6 percent at the end of each year on the outstanding balance at the beginning of the year. The company also would make year-end principal payments of $3,300,000 per year, completely retiring the issue by the end of the third year. Show Transcribed Text a. What is the value of the unlevered project (VU)? b. What is the present value of the project (VL)? c. What is the net present value of the project (NPV)?arrow_forwardEMC Corporation's current free cash flow of $450,000 and is expected to grow at a constant rate of 5.5%. The weighted average cost of capital is WACC = 14%. Calculate EMC's estimated value of operations. Do not round intermediate calculations. Round your answer to the nearest dollar.arrow_forward
- Dyrdek Enterprises has equity with a market value of $11.8 million and the market value of debt is $4.05million. The company is evaluating a new project thathas more risk than the firm. As a result, the companywill apply a risk adjustment factor of 2.1 percent. Thenew project will cost $2.40 million today and provideannual cash flows of $626, 000 for the next 6 years. Thecompany's cost of equity is 11.47 percent and thepretax cost of debt is 4.98 percent. The tax rate is 21percent. What is the project's NPV?arrow_forwardSuppose that Rose Industries is considering the acquisition of another firm in its industry for $137 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 4% every year thereafter. Rose currently maintains a debt to equity ratio of 1, its corporate tax rate is 21%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. The Free Cash Flow to Equity (FCFE) for the acquisition in year O is closest to ($ Million) (2 decimal places):arrow_forwardMilton Industries expects free cash flows of $19 million each year. Milton's corporate tax rate is 22 %, and its unlevered cost of capital is 13%. Milton also has outstanding debt of $73.37 million, and expects to maintain this level of debt permanently. a. What is the value of Miton Industries without leverage? b. What is the value of Milton Industries with leverage? Cam a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is 5 million (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $million. (Round to two decimal places)arrow_forward
- Erwin Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of ¢12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Division’s estimated free cash flow each year from 2013 through 2016 is given in the following table. Beyond 2016 to infinity, the firm expects its free cash flow to grow at 4% annually. Year Free Cash Flow (¢) 2013 800,000 2014 1,200,000 2015 1,400,000 2016 1,500,000 Use the free cash flow valuation model to estimate the value of Erwin’s entire Active Shoe Division. Use your finding in part (i) along with the data provided above to find this division’s common stock value. If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part (ii) to calculate its value per sharearrow_forwardHeavy Metal Corporation is expected to generate the following free cash flows over the next five years: Year 1 2 3 4 5 FCF ($ million) 51.1 69.2 78.8 76.4 80.1 After that, the free cash flows are expected to grow at the industry average of 3.9% per year. Using the discounted free cash flow model and a weighted average cost of capital of 13.5%: Estimate the enterprise value of Heavy Metal. (Round to two decimalplaces.) If Heavy Metal has no excess cash, debt of $285 million, and 43 million shares outstanding, estimate its share price. (Round to two decimalplaces.)arrow_forwardMokoko Ltd. is considering a number projects and thus need to estimate its cost of capital in order to estimate their NPV. The company’s current dividend is $2.25 per share, which has grown steadily at 6% each year for over a decade and is expected to continue doing so. Its stock currently trades at $26 and there are 2 million shares outstanding. The company’s 100,000 preferred shares trade at $22 and pay annual dividends of $3. Cash and marketable securities on the company’s balance sheet total $30.5 million and the firm pays a tax rate of 30%. Their existing long-term debt (face value of $100 million, semi-annual payments) pays a 9.5% coupon and has 12 years remaining before maturity. Due to current conditions, the required rate of return (yield to maturity) on this debt is 11% and any new debt issuance would be required to offer the same yield to investors (there is no term premium for 1 year vs 12 year debt). What is Mokoko Ltd's Debt/Equity ratio? Assuming the firm wants to…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY