a.
To determine: The Maximum Price per Share.
Introduction: The
The cost of debt is the effective interest rate of cost which a business earns on their current debts. Debt involves in the formation of capital structure. As the debt is considered as a deduction expenditure, the cost of debt is usually determined as after-tax cost in order to formulate similar to the cost of equity.
a.
Answer to Problem 21QP
The Maximum Price per Share is $62.17
Explanation of Solution
Determine the Total Market Value
Therefore the Total Market Value is $52,000,000
Determine the Weight of Debt and Equity
Therefore the Weight of Debt is 26.92% and Equity is 73.08%
Determine the WACC of the Company
Therefore the WACC of the Company is 9.04%
Determine the Cash Flow from Assets
Using a excel spreadsheet we compute the cash flow from assets as,
Excel Spreadsheet:
Excel Workings:
Determine the Terminal Value at the end of Year 5
Therefore the Terminal Value at the end of Year 5 is $192,947,048.74
Determine the Total Market Value of the Company
Using a excel spreadsheet we calculate the total value of company as,
Excel Spreadsheet:
Excel Workings:
Therefore the Total Market Value of the Company is $161,238,529.11
Determine the Total Market Value of Equity
Therefore the Total Market Value of Equity is $121,238,529.11
Determine the Maximum Price per Share
Therefore the Maximum Price per Share is $62.17
b.
To determine: The New Estimate of Maximum Price per Share.
b.
Answer to Problem 21QP
The Maximum Price per Share is $64.92
Explanation of Solution
Determine the Earnings Before Interest on Taxes,
Therefore the Earnings Before Interest on Taxes, Depreciation and Amortization (EBITDA) is $26,564,630
Determine the Terminal Value at the end of Year 5
Therefore the Terminal Value at the end of Year 5 is $212,517,040
Determine the Total Market Value of Company
Using a excel spreadsheet we calculate the total value of company as,
Excel Spreadsheet:
Excel Workings:
Therefore the Total Market Value of Company is $166,594,155.69
Determine the Total Market Value of Equity
Therefore the Total Market Value of Equity is $126,594,155.69
Determine the New Estimate of Maximum Price per Share
Therefore the New Estimate of Maximum Price per Share is $64.92
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Chapter 13 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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