12) No-Vaccines-Please (NVP) is a producer of cloth masks. Its free cash flow projections for the next two years are given below. Year 1 Year 2 10,000 12,000 Free Cash Flow After Year 2, NVP will continue growing at a constant rate of 2% (per year). The firm's tax rate is 30%. You can assume the firm will maintain a debt-equity ratio of 1 (which means its Equity/Value and Debt/Value ratios equal 0.5). The risk-free rate is 2%, and the market risk premium is 5%. a. Compute NVP's cost of equity. You should assume here that NVP's equity beta equals 1.6. b. Compute NVP's weighted average cost of capital. You should assume here that NVP's pre-tax cost of debt is 5%. c. Compute the terminal value of NVP's FCF in year 2 (i.e., the value in year 2 of all free cash flows occurring after year 2). d. Compute the total value of NVP (debt + equity). e. Compute the value of NVP's equity. You can assume here NVP has 80,000 of debt.
12) No-Vaccines-Please (NVP) is a producer of cloth masks. Its free cash flow projections for the next two years are given below. Year 1 Year 2 10,000 12,000 Free Cash Flow After Year 2, NVP will continue growing at a constant rate of 2% (per year). The firm's tax rate is 30%. You can assume the firm will maintain a debt-equity ratio of 1 (which means its Equity/Value and Debt/Value ratios equal 0.5). The risk-free rate is 2%, and the market risk premium is 5%. a. Compute NVP's cost of equity. You should assume here that NVP's equity beta equals 1.6. b. Compute NVP's weighted average cost of capital. You should assume here that NVP's pre-tax cost of debt is 5%. c. Compute the terminal value of NVP's FCF in year 2 (i.e., the value in year 2 of all free cash flows occurring after year 2). d. Compute the total value of NVP (debt + equity). e. Compute the value of NVP's equity. You can assume here NVP has 80,000 of debt.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:**Free Cash Flow Projections for No-Vaccines-Please (NVP)**
No-Vaccines-Please (NVP) is a producer of cloth masks. Its projected free cash flows for the next two years are as follows:
| Year | Free Cash Flow ($) |
|----------|-------------------------|
| Year 1 | 10,000 |
| Year 2 | 12,000 |
After Year 2, NVP is expected to grow at a constant rate of 2% per year. The firm’s tax rate is 30%. NVP will maintain a debt-equity ratio of 1.
**Assumptions:**
- Risk-free rate: 2%
- Market risk premium: 5%
- NVP’s equity beta: 1.6
- Pre-tax cost of debt: 5%
- Total debt: $80,000
**Tasks:**
a. **Compute NVP's Cost of Equity:**
- Use the given equity beta to calculate the cost of equity.
b. **Compute NVP's Weighted Average Cost of Capital (WACC):**
- Consider the pre-tax cost of debt.
c. **Compute the Terminal Value of NVP’s Free Cash Flow (FCF) in Year 2:**
- Calculate the value of all free cash flows after Year 2 with a constant growth assumption.
d. **Compute the Total Value of NVP (Debt + Equity):**
- Determine the overall value including both debt and equity components.
e. **Compute the Value of NVP’s Equity:**
- Given the total debt of $80,000, calculate the equity value.
This exercise will help students apply financial concepts such as free cash flow analysis, cost of equity, WACC, and valuation techniques in a practical, real-world context.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 4 steps
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.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education