e Imhoff Company's balance sheet shows the following labilities and net worth: 10,000 bonds (Issued at par value of $1,000 each, 6% seml-annual coupon, 10 years maturity remaining, and a current market price of $950) 1,000,000 shares of common stock outstanding Issued at $10 each. This past year's free cash flow (FCFO) was $1,000,000. For the next 2 years, free cash flows (FCF1, FCF2) are expected to grow by 20% per year, after which FF's will Increase at a constant rate of 5% per year. The company's WACC is estimated to be 9%. Finally, Imhoff has $1,000,000 invested in marketable securitles. This Investment is set aside for possible future acquisitions and is therefore not part of the company's day-to-day operations. Based on the above information, please answer the following questions: 1. What is the "terminal value" (or "horizon value") of Imhoff's free cash flows (FF's) from Year 3 onwards? 2. What is Imhoff's "value of operations" (or "enterprise value")? 3. What is Imhoff's "market value of debt"? 4. What is Imhoff's "market value of equity"? 5. What is intrinsic value of Imhoff® s share of common equity? (Note: For each question, please show detailed explanations as to how you proceed to your answer along with detailed calculations).
e Imhoff Company's balance sheet shows the following labilities and net worth: 10,000 bonds (Issued at par value of $1,000 each, 6% seml-annual coupon, 10 years maturity remaining, and a current market price of $950) 1,000,000 shares of common stock outstanding Issued at $10 each. This past year's free cash flow (FCFO) was $1,000,000. For the next 2 years, free cash flows (FCF1, FCF2) are expected to grow by 20% per year, after which FF's will Increase at a constant rate of 5% per year. The company's WACC is estimated to be 9%. Finally, Imhoff has $1,000,000 invested in marketable securitles. This Investment is set aside for possible future acquisitions and is therefore not part of the company's day-to-day operations. Based on the above information, please answer the following questions: 1. What is the "terminal value" (or "horizon value") of Imhoff's free cash flows (FF's) from Year 3 onwards? 2. What is Imhoff's "value of operations" (or "enterprise value")? 3. What is Imhoff's "market value of debt"? 4. What is Imhoff's "market value of equity"? 5. What is intrinsic value of Imhoff® s share of common equity? (Note: For each question, please show detailed explanations as to how you proceed to your answer along with detailed calculations).
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
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Question
The Imhoff Company's balance sheet shows the following labilities and net worth:
10,000 bonds (Issued at par value of $1,000 each, 6% seml-annual coupon, 10 years maturity
remaining, and a current market price of $950)
1,000,000 shares of common stock outstanding Issued at $10 each.
This past year's free cash flow (FCFO) was $1,000,000. For the next 2 years, free cash flows (FCF1,
FCF2) are expected to grow by 20% per year, after which FF's will Increase at a constant rate of
5% per year. The company's WACC is estimated to be 9%.
Finally, Imhoff has $1,000,000 invested in marketable securitles.
This Investment is set aside for possible future acquisitions and is therefore not part of the
company's day-to-day operations.
Based on the above information, please answer the following questions:
1. What is the "terminal value" (or "horizon value") of Imhoff's free cash flows (FF's) from Year 3
onwards?
2. What is Imhoff's "value of operations" (or "enterprise value")?
3. What is Imhoff's "market value of debt"?
4. What is Imhoff's "market value of equity"?
5. What is intrinsic value of Imhoff® s share of common equity?
(Note: For each question, please show detailed explanations as to how you proceed to your answer
along with detailed calculations).
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