(i) (ii) Calculate the enterprise value of the project using free cash flows (WACC) method If the firm still maintains a constant net debt-to-equity ratio after taking this project, how much new debt must the firm borrow? By how much does the market value of the firm's equity increase?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![Pivot, Inc. is currently valuing a new project that has the average risk of its investment projects.
The project requires upfront R&D and marketing expenses of $10 million and a $30 million
investment in equipment. The equipment will be obsolete in 3 years and will be depreciated
using the straight-line method over that period. For each year over the next 3 years, the project
offers annual sales of $100 million, has annual manufacturing costs of $30 million, and annual
operating expenses of $10 million. Further, the project requires no net working capital in year
0, and $2.0 million in net working capital in each year from year 1 to year 2 and no net working
capital in year 3. Beyond year 3, the project's free cash flows are expected to growth at an
annual rate of 1%.
Pivot currently has 20 million outstanding shares with its stock price of $30 per share, $320
million in debt, $20 million in excess cash, the cost of debt of 5%, and the cost of equity of
10%, and the corporate tax rate of 40%. The firm plans to maintain a constant net debt-equity
ratio for the foreseeable future, including any financing related to this new project.
(i)
(ii)
Calculate the enterprise value of the project using free cash flows (WACC) method
If the firm still maintains a constant net debt-to-equity ratio after taking this project,
how much new debt must the firm borrow? By how much does the market value of
the firm's equity increase?
(iii)
Calculate the unlevered value of the project using the adjusted present value (APV)
method
(iv)
(v)
Calculate the present value of all interest tax shields of the project
Calculate the net present value (that is, equity value) of the project using the flow
to equity method](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd0bbc1db-83a0-4094-9ce8-127bbb1d128e%2Fcda3cb5e-c803-4384-bf45-0125f10c68be%2Fk9jvlz_processed.png&w=3840&q=75)
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