Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock price is $45 per share, with 2.3 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.4 and can borrow at 4.0%, just 20 basis points over the risk-free rate of 3.8%. The expected return of the market is 9.6%, and PKGR's tax rate is 22%. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.4, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.4 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? %. (Round to two decimal places.) The constant expected growth rate of free cash flow is consistent with its current stock price is
Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock price is $45 per share, with 2.3 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.4 and can borrow at 4.0%, just 20 basis points over the risk-free rate of 3.8%. The expected return of the market is 9.6%, and PKGR's tax rate is 22%. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.4, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.4 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings. a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? %. (Round to two decimal places.) The constant expected growth rate of free cash flow is consistent with its current stock price is
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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Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.16. Its current stock price is $45 per share, with 2.3 billion shares outstanding. The firm enjoys very stable demand for its products, and consequently it has a low equity beta of 0.4 and can borrow at 4.0%,
just 20 basis points over the risk-free rate of 3.8%. The expected return of the market is 9.6%, and PKGR's tax rate is 22%.
a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price?
b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.4, it believes its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.4 through a leveraged recap, determine the increase
or decrease in the stock price that would result from the anticipated tax savings.
a. This year, PKGR is expected to have free cash flows of $5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price?
%. (Round to two decimal places.)
The constant expected growth rate of free cash flow is consistent with its current stock price is
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