9.4. Canton Corporation is a privately owned firm that engages in the production and sale of industrial chemicals, primarily in North America. The firm's primary product line consists of organic solvents and intermediates for pharmaceutical, agricultural, and chemical products. Canton's managers have recently been considering the possibility of taking the company public and have asked the firm's investment banker to perform some preliminary analysis of the value of the firm's equity. To support its analysis, the investment banker has prepared pro forma financial statements for each of the next four years under the (simplifying) assumption that firm sales are flat (i. e., have a zero rate of growth), the corporate tax rate equals 30%, and capital expenditures are equal to the estimated depreciation expense. (Look at the picture sent) In addition to the financial information on Canton, the investment banker has assembled the following information concerning current rates of return in the capital market: The current market rate of interest on ten-year Treasury bonds is 7%, and the market risk premium is estimated to be 5%. Canton's debt currently carries a rate of 8%, and this is the rate the firm would have to pay for any future borrowing as well. Using publicly traded firms as proxies, the estimated equity beta for Canton is 1.60. a. What is Canton's cost of equity capital? What is the after-tax cost of debt for the firm? b. Estimate the enterprise value of Canton using the traditional WACC model. Base your estimate on your previous answers, and assume that the FCFs after year 4 are a level perpetuity equal to the year 4 FCF. How does your estimate compare to your earlier estimate using the sum of the values of the firm's debt and equity?
9.4. Canton Corporation is a privately owned firm that engages in the production and sale of industrial chemicals, primarily in North America. The firm's primary product line consists of organic solvents and intermediates for pharmaceutical, agricultural, and chemical products. Canton's managers have recently been considering the possibility of taking the company public and have asked the firm's investment banker to perform some preliminary analysis of the value of the firm's equity.
To support its analysis, the investment banker has prepared pro forma financial statements for each of the next four years under the (simplifying) assumption that firm sales are flat (i. e., have a zero rate of growth), the corporate tax rate equals 30%, and capital expenditures are equal to the estimated depreciation expense.
(Look at the picture sent)
In addition to the financial information on Canton, the investment banker has assembled the following information concerning current
The current market rate of interest on ten-year Treasury bonds is 7%, and the market risk premium is estimated to be 5%.
Canton's debt currently carries a rate of 8%, and this is the rate the firm would have to pay for any future borrowing as well.
Using publicly traded firms as proxies, the estimated equity beta for Canton is 1.60.
a. What is Canton's
b. Estimate the enterprise value of Canton using the traditional WACC model. Base your estimate on your previous answers, and assume that the FCFs after year 4 are a level perpetuity equal to the year 4 FCF. How does your estimate compare to your earlier estimate using the sum of the values of the firm's debt and equity?
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