Assume that an analyst has examined your company and has estimated that the free cash flow at the end of the year (Year 1) will be $450 million, that this free cash flow will grow at a constant rate of 8 percent per year, and that your company's weighted average cost of capital is 12 percent. If the company currently has debt and preferred stock totaling $4.500 million (4.5 billion), and if there are 200 million outstanding shares of common stock, then determine what the intrinsic value of the company's stock should be today (Year O) on a per share basis.
Assume that an analyst has examined your company and has estimated that the free cash flow at the end of the year (Year 1) will be $450 million, that this free cash flow will grow at a constant rate of 8 percent per year, and that your company's weighted average cost of capital is 12 percent. If the company currently has debt and preferred stock totaling $4.500 million (4.5 billion), and if there are 200 million outstanding shares of common stock, then determine what the intrinsic value of the company's stock should be today (Year O) on a per share basis.
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:Assume that an analyst has examined your company and has estimated that the free cash flow at the
end of the year (Year 1) will be $450 million, that this free cash flow will grow at a constant rate of 8
percent per year, and that your company's weighted average cost of capital is 12 percent. If the
company currently has debt and preferred stock totaling $4,500 million (4.5 billion), and if there are
200 million outstanding shares of common stock, then determine what the intrinsic value of the
company's stock should be today (Year O) on a per share basis.
O $35.00
O$37.50
O $29.25
$31.00
$33.75
Transcribed Image Text:Assume that a firm starts out as an all equity firm with $1,000,000 of equity, $1,000,000 of assets,
and a return on assets (ROA) of 10 percent. Also assume that management then makes the decision
to issue $200,000 of debt, at a before-tax rate of 5 percent, and use the proceeds to buy back
$200,000 of equity. Based on this information, and assuming that the firm's tax rate is 40 percent,
determine what the return on equity (ROE) will be after the buy back.
O 10.50%
14.25%
O 11.75 %
13.00%
O 15.50%
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 4 images
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