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.)
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
Section: Chapter Questions
Problem 1PS
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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
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
free cash flow is consistent with its current stock price?
$5.5
billion. What constant expected growth rate of 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%.
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