Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to date because the Company is still at its early stages. With this, they have the following available information: The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%. The target capital structure of Little Lemon is at 60% debt and 40% equity Little Lemon was able to determine that its cost of debt is estimated as: With 3 years maturity - 6.50% With 4 years maturity - 7.0% With 5 years maturity - 8.0% The following are the information about the current debts issued by Little Lemon A 3-year maturity instrument carries a Php500,000 face value and 8.0%coupon A 5-year maturity instrument carries a Php500,000 face value and 8.0%coupon Considering the current crisis, equity investors generally demand a 3.5%premium over government securities Little Lemon's estimated beta is at 1.2 The following summarizes the free cash flows for Little Lemon: Year 1 - Php200,000 Year 2 - Php300,000 Year 3 - Php400,000 Year 4 - Php600,000 Year 5 - Php1,000,000 Little Lemon with cease operations after year 5 1.What is the enterprise value of Little Lemon assuming weighted average cost of debt is at 7.25% and tax rate is at 30%? Make sure to use WACC rounded to the second decimal point. 2. What is the equity value of Little Lemon assuming weighted average cost of debt isat 7.25% and tax rate is at 30%? Make sure to use WACC rounded to the second decimal point.
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.
Little Lemon Co. is identifying the value of its equity using the enterprise value approach as they have never issued dividends to date because the Company is still at its early stages. With this, they have the following available information:
The government's real free rate for its debt securities is estimated at 3.5% with an estimated inflation premium of 1.5%.
The target capital structure of Little Lemon is at 60% debt and 40% equity
Little Lemon was able to determine that its cost of debt is estimated as:
With 3 years maturity - 6.50%
With 4 years maturity - 7.0%
With 5 years maturity - 8.0%
The following are the information about the current debts issued by Little Lemon
A 3-year maturity instrument carries a Php500,000 face value and 8.0%coupon
A 5-year maturity instrument carries a Php500,000 face value and 8.0%coupon
Considering the current crisis, equity investors generally demand a 3.5%premium over government securities
Little Lemon's estimated beta is at 1.2
The following summarizes the
Year 1 - Php200,000
Year 2 - Php300,000
Year 3 - Php400,000
Year 4 - Php600,000
Year 5 - Php1,000,000
Little Lemon with cease operations after year 5
1.What is the enterprise value of Little Lemon assuming weighted average cost of debt is at 7.25% and tax rate is at 30%? Make sure to use WACC rounded to the second decimal point.
2. What is the equity value of Little Lemon assuming weighted average cost of debt isat 7.25% and tax rate is at 30%? Make sure to use WACC rounded to the second decimal point.
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