Problem 2. Erwan Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of $12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Division's estimated free cash flow each year from 2013 through 2016 is given in the following table. Beyond 2016 to infinity, the firm expects its free cash flow to grow at 4% annually. Year (f) 2013 2014 2015 2016 Free cash flow (FCF₂) $ 800,000 1,200,000 1,400,000 1,500,000 b. a. Use the free cash flow valuation model to estimate the value of Erwan's entire Active Shoe Division. Use your finding in part a along with the date provided above to find the division's common stock value. If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part b to calculate its value per share. C.
Problem 2. Erwan Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market value of $12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Division's estimated free cash flow each year from 2013 through 2016 is given in the following table. Beyond 2016 to infinity, the firm expects its free cash flow to grow at 4% annually. Year (f) 2013 2014 2015 2016 Free cash flow (FCF₂) $ 800,000 1,200,000 1,400,000 1,500,000 b. a. Use the free cash flow valuation model to estimate the value of Erwan's entire Active Shoe Division. Use your finding in part a along with the date provided above to find the division's common stock value. If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part b to calculate its value per share. C.
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:Problem 2. Erwan Footwear wishes to assess the value of its Active Shoe Division. This division has debt with a market
value of $12,500,000 and no preferred stock. Its weighted average cost of capital is 10%. The Active Shoe Division's
estimated free cash flow each year from 2013 through 2016 is given in the following table. Beyond 2016 to infinity, the
firm expects its free cash flow to grow at 4% annually.
a.
b.
C.
Year (t)
2013
2014
2015
2016
Free cash flow (FCF₂)
$ 800,000
1,200,000
1,400,000
1,500,000
Use the free cash flow valuation model to estimate the value of Erwan's entire Active Shoe Division.
Use your finding in part a along with the date provided above to find the division's common stock value.
If the Active Shoe Division as a public company will have 500,000 shares outstanding, use your finding in part
b to calculate its value per share.
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