Question

76

Samsco has current after-tax operating income of $65 million
and a cost of capital of 9.5%. Assume that the firm is in stable
growth, growing 3% a year forever and that the reinvestment rate is
35%.

Using the calculation from the previous question, please
compute the value of Samsco.

Answer #1

Answer | ||||||||

Given that - | ||||||||

Current year after tax operating income | $65.00 | Million | ||||||

Growth rate G = | 3.00% | |||||||

required rate R = | 9.50% | |||||||

Reinvestment rate = | 35.00% | |||||||

Value of firm can be computed using below formula | ||||||||

Value of firm = (Current year after tax operating income *(1+Growth%)*(1-reinvestment rate))/(Required rate of return-growth rate) | ||||||||

=(65*(1+0.03)*(1-0.35))/(0.095-0.03) | $ 669.50 | million |

The current capital structure is 35 percent debt and 65 percent
equity. The after-tax cost of our debt is 6 percent, and the cost
of our equity (in retained earnings) is 13 percent. Please compute
the firm’s current weighted average cost of capital. One of the
things we discussed with our investor, due to the current low
interest rate environment, is moving our capital structure to 45
percent debt and 55 percent equity. With this new structure, the
after-tax cost...

Standish Inc. is a conglomerate that is expected to generate
$100 million in after-tax operating income next year, growing at
2.50% a year in perpetuity. It is planning to sell of its steel
division for $200 million and you have been given the following
information on the company and its steel division. Estimate the
value of Standish's equity after the divestiture assuming that it
has no cash and no debt, pre divestiture, but plans to hold the
divestiture proceeds as...

Dabney Electronics currently has no debt. Its operating income
(EBIT) is $20 million and its tax rate is 40 percent. It pays out
all of its net income as dividends and has a zero growth rate. It
has 2.5 million shares of stock outstanding. If it moves to a
capital structure that has 40 percent debt and 60 percent equity
(based on market values), its investment bankers believe its
weighted average cost of capital would be 10 percent. What would...

Newcastle Inc. currently has no debt, annual earnings before
interest and taxes of $76 million and an average tax rate of 34%.
Net income is expected to stay constant forever. The firm pays out
100% of net income as dividends.
Using the CAPM, the firm estimates that its cost of equity is
13%. The risk-free rate is 2% and the expected equity market risk
premium is 7%. There are 8 million shares outstanding.
The firm is considering issuing bonds worth...

Assume today is December 31, 2019. Barrington Industries expects
that its 2020 after-tax operating income [EBIT(1 – T)] will be $430
million and its 2020 depreciation expense will be $65 million.
Barrington's 2020 gross capital expenditures are expected to be
$110 million and the change in its net operating working capital
for 2020 will be $30 million. The firm's free cash flow is expected
to grow at a constant rate of 5% annually. Assume that its free
cash flow occurs...

Anker Inc. is a listed company in New York. Its current before
interest after-tax operating cash flow is $100 million. The cash
flow is expected to grow at 6% per annum over the next three years,
after which the growth will fall to 3% per annum and stay at this
rate forever. The following information is also available:
Tax rate
30%
Risk-free rate
4%
Market return
12%
Equity beta
2
Cost of debt
7%
D/E
60%
Given the above data,...

XYZ Corp. had operating income this year of $120 million and is
in the 40% tax bracket. The firm carried $200 million in debt at a
cost of 10% interest. This year's depreciation expense was $30
million. XYZ Corp. has budgeted $40 million in capital spending and
an additional $5 million in non-cash working capital. No change is
anticipated in the company's net debt. What is XYZ Corp.'s expected
free cash flow to equity (FCFE)?
Select one:
A. $15 million...

Assume today is December 31, 2016. Barrington Industries expects
that its 2017 after-tax operating income [EBIT(1 – T)] will be $410
million and its 2017 depreciation expense will be $65 million.
Barrington's 2017 gross capital expenditures are expected to be
$110 million and the change in its net operating working capital
for 2017 will be $30 million. The firm's free cash flow is expected
to grow at a constant rate of 5.5% annually. Assume that its free
cash flow occurs...

Assume today is December 31, 2013. Barrington Industries expects
that its 2014 after-tax operating income [EBIT(1 - T)] will be $420
million and its 2014 depreciation expense will be $60 million.
Barrington's 2014 gross capital expenditures are expected to be
$110 million and the change in its net operating working capital
for 2014 will be $25 million. The firm's free cash flow is expected
to grow at a constant rate of 5.5% annually. Assume that its free
cash flow occurs...

WACC AND COST OF COMMON EQUITY
Kahn Inc. has a target capital structure of 65% common equity
and 35% debt to fund its $10 billion in operating assets.
Furthermore, Kahn Inc. has a WACC of 13%, a before-tax cost of debt
of 8%, and a tax rate of 40%. The company's retained earnings are
adequate to provide the common equity portion of its capital
budget. Its expected dividend next year (D1) is $2, and
the current stock price is $25....

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 26 minutes ago

asked 39 minutes ago

asked 42 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago