Chapter 13, Problem 21QAP

a

Summary Introduction

Adequate information:

Market value of debt $\left({\text{MV}}_{\text{d}}\right)$ = $115,000,000

Cost of debt $\left({\text{K}}_{\text{d}}\right)$ = 6%

Market value of equity $\left({\text{MV}}_{\text{e}}\right)$ = $360,000,000

Cost of equity $\left({\text{K}}_{\text{e}}\right)$ = 11%

Debt value $\left({\text{V}}_{\text{D}}\right)$ = $45,000,000

Projected EBIT in one year $\left({\text{EBIT}}_{\text{Proj}}\right)$ = $17,300,000

EBIT growth rate for first 5 years $\left(\text{g}\right)$ = 10%

EBIT perpetuity growth rate $\left(\text{G}\right)$ = 3%

Net working capital percentage for EBIT $\left({\text{WC}}_{\text{r}}\right)$ = 9%

Capital spending percentage for EBIT $\left({\text{CS}}_{\text{r}}\right)$ = 15%

Depreciation for EBIT $\left({\text{D}}_{\text{r}}\right)$ = 8%

Shares outstanding $\left(\text{SO}\right)$ = 1,950,000

Tax rate $\left(\text{t}\right)$ = 21%

To compute: Stock price for the company J.

Introduction: The term Share price refers to the valuation of the stock based on factor considerations such as total debt, enterprise value, shares outstanding, etc.

b

Summary Introduction

Adequate information:

Market value of debt $\left({\text{MV}}_{\text{d}}\right)$ = $115,000,000

Cost of debt $\left({\text{K}}_{\text{d}}\right)$ = 6%

Market value of equity $\left({\text{MV}}_{\text{e}}\right)$ = $360,000,000

Cost of equity $\left({\text{K}}_{\text{e}}\right)$ = 11%

Debt value $\left({\text{V}}_{\text{D}}\right)$ = $45,000,000

Projected EBIT in one year $\left({\text{EBIT}}_{\text{Proj}}\right)$ = $17,300,000

EBIT growth rate for first 5 years $\left(\text{g}\right)$ = 10%

EBIT perpetuity growth rate $\left(\text{G}\right)$ = 3%

Net working capital percentage for EBIT $\left({\text{WC}}_{\text{r}}\right)$ = 9%

Capital spending percentage for EBIT $\left({\text{CS}}_{\text{r}}\right)$ = 15%

Depreciation for EBIT $\left({\text{D}}_{\text{r}}\right)$ = 8%

Shares outstanding $\left(\text{SO}\right)$ = 1,950,000

Tax rate $\left(\text{t}\right)$ = 21%

EV/EBITDA = 9

To compute: Stock price

Introduction: The term Share price refers to the valuation of the stock based on factor considerations such as total debt, enterprise value, shares outstanding, etc.