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You are an analyst in the Finance department at a conglomerate, where the CFO believes the
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- Assume that you have an opportunity to buy the stock of CoolTech, Inc., an IPO being offered for $10.78 per share. Although you are very much interested in owning the company, you are concerned about whether it is fairly priced. To determine the value of the shares, you have decided to apply the free cash flow valuation model to the firm's financial data that you've accumulated from a variety of data sources. The key values you have compiled are summarized in the following table, a. Use the free cash flow valuation model to estimate CoolTech's common stock value per share. b. Judging by your finding in part a and the stock's offering price, should you buy the stock? c. On further analysis, you find that the growth rate in FCF beyond year 4will be 5% rather than 4%. What effect would this finding have on your responses in parts a and b?2. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Purple Panda Importers: Suppose Purple Panda Importers is considering a project that will require $350,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $60,000. • Common equity outstanding will be 25,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be addition, Purple Panda's earnings per share (EPS) will be Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shar Panda…Your sister is thinking about starting a new business. The company would require $300,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business? a. $44,145 b. $38,475 c. $33,210 d. $40,500 e. $41,310
- You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wa) to only 10%. The company is small, so it is not subject to the interest deduction limitation. Other things held constant, and based on th data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROEHigher - ROELower? Do not round your intermediate calculations. Operating Data Other Data Capital $4,000 Higher wd 60% ROIC = EBIT(1 - T)/Capital 12.00% Higher interest rate 13% %3D Tax rate 25% Lower wd 10% Lower interest rate 9% a. 3.75% b. 2.22% C 2.80% d. 2.54% e. 1,87%Suppose your company needs $18 million to build a new assembly line. Your target debt- equity ratio is .7. The flotation cost for new equity is 7 percent, but the flotation cost for debt is only 4 percent. Your boss has decided to fund the project by borrowing money because the flotation costs are lower and the needed funds are relatively small. a. What is your company's weighted average flotation cost, assuming all equity is raised externally? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the true cost of building the new assembly line after taking flotation costs into account? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to the nearest whole number, e.g., 1,234,567.) a. Flotation cost b. Amount raised GA 5.77 % 19 X1- Assume that you are appointed as a finance manager of a FMCG company. How you will design the capital structure of the company if company needs to raise capital from $100,000 to $10,00,000 with the mix of Equity and Debt. Determine the EPS in each case and evaluate the best possible actions for the company 2- During the production process if company needs to raise $ 300,000 more capital then which option suits to company? Through Debt or Equity? Can please someone help me solve this? I dont really know how and my assignment due date is after three hours? please someone help?
- Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an 6 percent return and can be financed at 3 percent with debt. Later in the year, the firm turns down an opportunity to buy a new machine that would yield a 14 percent return but would cost 16 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure. a. Compute the weighted average cost of capital. Note: Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places. Weighted average cost of capital b. Which project(s) should be accepted? O New machine. O Piece of equipment. %S. Bouchard and Company hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: DO $0.85; PO $22.00; and g 6.00% (constant). The CEO thinks, however, that the stock price is temporanly depressed, and that it will soon rise to $34.00. Based on the DCF approach, by how much would the cost of common from retained earnings change if the stock price changes as the CEO expects?.A company puts together a set of cash flow projections and calculates an IRR of 25% for the project. The firm's cost of capital is about 10%. The CEO maintains that the favorability of the calculated IRR relative to the cost of capital makes the project an easy choice for acceptance and urges management to move forward immediately. i. Should this project be evaluated using different standards? ii. How does the possibility of bankruptcy as a result of the project affect the analysis? iii. Are capital budgeting rules still appropriate?
- An outside consultant has suggested that because debt is cheaper than equity, the firm should switch to a capital structure that is 50 percent debt and 50 percent equity. Under this new and more debt-oriented arrangement, the aftertax cost of debt is 9.00 percent, and the cost of common equity (in the form of retained earnings) is 17.00 percent. b. Recalculate the firm's weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Debt Common equity Weighted average cost of capital Weighted Cost % 0.00 %As a consultant to First Responder Inc., you have obtained the following data (dollars in millions). The company plans to pay out all of its earnings as dividends, hence g = 0. Also, no net new investment in operating capital is needed because growth is zero. The CFO believes that a move from zero debt to 80.0% debt would cause the cost of equity to increase from 10.0% to 14.0%, and the interest rate on the new debt would be 9.0%. What would the firm's total market value be if it makes this change? Hints: Find the FCF, which is equal to NOPAT = EBIT(1 - T) because no new operating capital is needed, and then divide by (WACC - g). Do not round your intermediate calculations. Oper. income (EBIT) $800 Tax rate 25.0% New cost of equity (rs) 14.00% New wd 80.0% Interest rate (rd) 9.00% $5,854 $4,917 $6,205 $7,317 $5,561You are now an equity analyst. We now find that the actual valuation of Company X is 130. Your manager suggests basing the price on a discounted dividend model and a discounted free cash flow valuation method. However, these two methods may produce very different estimates when applied to actual data. The discounted dividend model works out to a price of 60, while the discounted free cash flow valuation method works out to a price of 10. Question: Explain to your management why the two valuation methodologies provide different estimations. Specifically, discuss the assumptions implicit in the two methodologies, as well as the assumptions you made when doing your analysis. Why do these projections differ from Company X's current stock price?