I. Question 1 (Free Cash Flow Approach, past exam question) Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering the addition of a new system to its current product line. The following data has been forecasted: 2018 2019 2020 2021 30,000 35,000 40,000 45,000 Depreciation EBIT 100,000 125,000 150,000 175,000 Investment in Operating Assets 30,000 40,000 50,000 60,000 The market value of the firm's debt is $300,000, and it has $150,000 in marketable securities. The company also has 10,000 shares of preferred stock that pay an annual dividend of $0.75 per share. Investors require a rate of return of 7% on preferred stocks of similar risk. The firm has 100,000 shares of common stock outstanding, and its weighted average cost of capital is 12%. The expected tax rate is 35% in the next two years and 40% after that. a) Calculate the free cash flow for each of the next four years. . b) After 2021 the firm's free cash flow is expected to grow at 5% per year indefinitely. What is the value of the stock today? . c) Assume that after 2021 the firm's free cash flow is expected to grow at 9% per year for four years. After that time, the firm's free cash flow will grow at 5% indefinitely. Using the two-stage dividend growth model what is the value of the stock?
I. Question 1 (Free Cash Flow Approach, past exam question) Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering the addition of a new system to its current product line. The following data has been forecasted: 2018 2019 2020 2021 30,000 35,000 40,000 45,000 Depreciation EBIT 100,000 125,000 150,000 175,000 Investment in Operating Assets 30,000 40,000 50,000 60,000 The market value of the firm's debt is $300,000, and it has $150,000 in marketable securities. The company also has 10,000 shares of preferred stock that pay an annual dividend of $0.75 per share. Investors require a rate of return of 7% on preferred stocks of similar risk. The firm has 100,000 shares of common stock outstanding, and its weighted average cost of capital is 12%. The expected tax rate is 35% in the next two years and 40% after that. a) Calculate the free cash flow for each of the next four years. . b) After 2021 the firm's free cash flow is expected to grow at 5% per year indefinitely. What is the value of the stock today? . c) Assume that after 2021 the firm's free cash flow is expected to grow at 9% per year for four years. After that time, the firm's free cash flow will grow at 5% indefinitely. Using the two-stage dividend growth model what is the value of the stock?
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
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Transcribed Image Text:I. Question 1 (Free Cash Flow Approach, past exam question)
Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering
the addition of a new system to its current product line. The following data has been
forecasted:
Depreciation
EBIT
Investment in Operating Assets
2019
2020
2021
2018
30,000 35,000 40,000
45,000
100,000 125,000 150,000
175,000
30,000 40,000 50,000 60,000
The market value of the firm's debt is $300,000, and it has $150,000 in marketable securities.
The company also has 10,000 shares of preferred stock that pay an annual dividend of $0.75
per share. Investors require a rate of return of 7% on preferred stocks of similar risk. The firm
has 100,000 shares of common stock outstanding, and its weighted average cost of capital is
12%. The expected tax rate is 35% in the next two years and 40% after that.
a) Calculate the free cash flow for each of the next four years.
b) After 2021 the firm's free cash flow is expected to grow at 5% per year indefinitely.
What is the value of the stock today?
. c) Assume that after 2021 the firm's free cash flow is expected to grow at 9% per year
for four years. After that time, the firm's free cash flow will grow at 5% indefinitely.
Using the two-stage dividend growth model, what is the value of the stock?
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