Prokter and Gramble​ (PKGR) has historically maintained a​ debt-equity ratio of approximately 0.23. Its current stock price is $54 per​ share, with 2.1 billion shares outstanding. The firm enjoys very stable demand for its​ products, and consequently it has a low equity beta of 0.575 and can borrow at 4.3​%, just 20 basis points over the​ risk-free rate of 4.1​%. The expected return of the market is 9.9​%, and​ PKGR's tax rate is 26​%. 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 0.575​, it believes its borrowing costs will rise only slightly to 4.6​%. If PKGR announces that it will raise its​ debt-equity ratio to 0.575 through a leveraged​ recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.       Question content area bottom Part 1 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?   The constant expected growth rate of free cash flow is consistent with its current stock price is enter your response here​%. ​ (Round to two decimal​ places.)

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
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Prokter and Gramble​ (PKGR) has historically maintained a​ debt-equity ratio of approximately
0.23.
Its current stock price is
$54
per​ share, with
2.1
billion shares outstanding. The firm enjoys very stable demand for its​ products, and consequently it has a low equity beta of
0.575
and can borrow at
4.3​%,
just 20 basis points over the​ risk-free rate of
4.1​%.
The expected return of the market is
9.9​%,
and​ PKGR's tax rate is
26​%.
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
0.575​,
it believes its borrowing costs will rise only slightly to
4.6​%.
If PKGR announces that it will raise its​ debt-equity ratio to
0.575
through a leveraged​ recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.
 
 
 

Question content area bottom

Part 1
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?
 
The constant expected growth rate of free cash flow is consistent with its current stock price is
enter your response here​%.
​ (Round to two decimal​ places.)
 
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