Year 0 1 Revenue 600.00 Fixed costs 100.00 Variable costs 200.00 Additional investment in NWC 10.00 Additional investment in operating long-term assets 70.00 Depreciation 60.00 Interest expenses 35.00 Newly issued debt 25.00 Principle repayments 15.00 Tax rate 0.40 Market value of the firm: Price per share No. of shares Market value Short-term debt 100.00 Long-term debt 600.00 Preferred stock 10.00 10 100.00 Common stock, equity 18.00 100 1,800.00 Total 2,600.00 Cost of equity (Rs) 0.1500 Growth rate per year from year 1 through year 5 0.10 Growth rate after year 5 0.07 What is the price per share according to the equity free cash flow model? Select one: a. $18.29 b. $10.98 c. $15.51 d. $20.87 e. $12.33
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
| Year | 0 | 1 | |
| Revenue | 600.00 | ||
| Fixed costs | 100.00 | ||
| Variable costs | 200.00 | ||
| Additional investment in NWC | 10.00 | ||
| Additional investment in operating long-term assets | 70.00 | ||
| 60.00 | |||
| Interest expenses | 35.00 | ||
| Newly issued debt | 25.00 | ||
| Principle repayments | 15.00 | ||
| Tax rate | 0.40 | ||
| Market value of the firm: | |||
| Price per share | No. of shares | Market value | |
| Short-term debt | 100.00 | ||
| Long-term debt | 600.00 | ||
| 10.00 | 10 | 100.00 | |
| Common stock, equity | 18.00 | 100 | 1,800.00 |
| Total | 2,600.00 | ||
| 0.1500 |
| Growth rate per year from year 1 through year 5 | 0.10 |
| Growth rate after year 5 | 0.07 |
What is the price per share according to the equity
Select one:
a. $18.29
b. $10.98
c. $15.51
d. $20.87
e. $12.33
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