Plantita Corporation, a garden and landscape service provider, had revenues of P200 million in 2012 and reported losses of P3. 1 million. It had earnings before interest and taxes of P12 million in 2012, and had debt outstanding of P105 million (in market value terms). There are 15. 9 million shares outstanding, trading at P10 per share. The pre-tax interest rate on debt owed by the firm is 8. 5%, and the stock has a beta of 1. 15 and a market risk premium of 5. 5%. The firm's EBIT is expected to increase 10% a year from 2013 to 2016, after which the growth rate is expected to drop to 5% in the long term. Capital expenditures will be offset by depreciation, and working capital needs are negligible. (The corporate tax rate is 30%, and the treasury bond rate is 7%. ) Show your solutions. A. Compute the WACC. B. Estimate the value of the firm using the discounted cash flow method. C. Estimate the value of equity on a per share basis (hint: deduct the market value of the liability from the value of the firm first before you can get the value of equity). D. If the stocks of Plantita Corporation is currently sold at P2 per share in the market, based on your computation is it undervalued or overvalued?
Plantita Corporation, a garden and landscape service provider, had revenues of P200 million in 2012 and reported losses of P3. 1 million. It had earnings before interest and taxes of P12 million in 2012, and had debt outstanding of P105 million (in market value terms). There are 15. 9 million shares outstanding, trading at P10 per share. The pre-tax interest rate on debt owed by the firm is 8. 5%, and the stock has a beta of 1. 15 and a market risk premium of 5. 5%. The firm's EBIT is expected to increase 10% a year from 2013 to 2016, after which the growth rate is expected to drop to 5% in the long term. Capital expenditures will be offset by depreciation, and working capital needs are negligible. (The corporate tax rate is 30%, and the treasury bond rate is 7%. ) Show your solutions. A. Compute the WACC. B. Estimate the value of the firm using the discounted cash flow method. C. Estimate the value of equity on a per share basis (hint: deduct the market value of the liability from the value of the firm first before you can get the value of equity). D. If the stocks of Plantita Corporation is currently sold at P2 per share in the market, based on your computation is it undervalued or overvalued?
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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Transcribed Image Text:Plantita Corporation, a garden and landscape service
provider, had revenues of P200 million in 2012 and
reported losses of P3.1 million. It had earnings before
interest and taxes of P12 million in 2012, and had
debt outstanding of P105 million (in market value
terms). There are 15. 9 million shares outstanding,
trading at P10 per share. The pre-tax interest rate on
debt owed by the firm is 8. 5%, and the stock has a
beta of 1. 15 and a market risk premium of 5. 5%. The
firm's EBIT is expected to increase 10% a year from
2013 to 2016, after which the growth rate is expected
to drop to 5% in the long term. Capital expenditures
will be offset by depreciation, and working capital
needs are negligible. (The corporate tax rate is 30%,
and the treasury bond rate is 7%. ) Show your
solutions.
A. Compute the WACC.
B. Estimate the value of the firm using the
discounted cash flow method.
C. Estimate the value of equity on a per share basis
(hint: deduct the market value of the liability from
the value of the firm first before you can get the
value of equity).
D. If the stocks of Plantita Corporation is currently
sold at P2 per share in the market, based on your
computation is it undervalued or overvalued?
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