Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 28% of the company's present value, and you believe that at this capital structure the company's debtholders will demand a return of 8% and stockholders will require 11%. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 21%) will be $66 million and that investment in plant and net working capital will be $28 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year. a. What is the total value of Icarus? b. What is the value of the company's equity? Note: For all the requirements, do not round intermediate calculations. Enter your answers in dollars rounded to 2 decimal places. a. Total value b. Company's equity
Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 28% of the company's present value, and you believe that at this capital structure the company's debtholders will demand a return of 8% and stockholders will require 11%. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 21%) will be $66 million and that investment in plant and net working capital will be $28 million. Thereafter, operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year. a. What is the total value of Icarus? b. What is the value of the company's equity? Note: For all the requirements, do not round intermediate calculations. Enter your answers in dollars rounded to 2 decimal places. a. Total value b. Company's equity
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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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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Transcribed Image Text:Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to
maintain debt at 28% of the company's present value, and you believe that at this capital structure the company's debtholders will
demand a return of 8% and stockholders will require 11%. The company is forecasting that next year's operating cash flow (depreciation
plus profit after tax at 21%) will be $66 million and that investment in plant and net working capital will be $28 million. Thereafter,
operating cash flows and investment expenditures are forecast to grow in perpetuity by 4% a year.
a. What is the total value of Icarus?
b. What is the value of the company's equity?
Note: For all the requirements, do not round intermediate calculations. Enter your answers in dollars rounded to 2 decimal places.
a. Total value
b. Company's equity
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