Question

Lansing Corporation reported net income of $61 million for last year. Depreciation expense totaled $15 million...

Lansing Corporation reported net income of $61 million for last year. Depreciation expense totaled $15 million and capital expenditures came to $6 million. Free cash flow is expected to grow at a rate of 4.7% for the foreseeable future. Lansing faces a 40% tax rate and has a 0.38 debt to equity ratio with $290 million (market value) in debt outstanding. Lansing's equity beta is 1.61, the risk-free rate is currently 5% and the market risk premium is estimated to be 6.4%. What is the current total value of Lansing's equity (in millions)?

Homework Answers

Answer #1

First, we calculate the free cash flow. It will be = Net Income x (1-t) + Depreciation - Capital Expenditures = 61 x (1 - 0.4) + 15 - 6 = 45.6 million. Now, we will use the Gordon growth formula to calculate the equaity value:

Equity Value = FCF x (1+g)/(R - g)

Growth is known to us but not the cost of equity. The cost of equity will be calculated by the CAPM formula given as:

R = Rf + beta x (Rm - Rf) = 5 + 1.61 x 6.4 = 15.304%.

Hence, the equity value will be = 45.6 x 1.047/(0.15304 - 0.047) = $450.237 million.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Lambert Corporation reported EBIT of $60 million for last year. Depreciation expense totaled $20 million and...
Lambert Corporation reported EBIT of $60 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 4.5 percent for the foreseeable future. Lambert faces a 21 percent tax rate and has a .45 debt to equity ratio with $255 million (market value) in debt outstanding. Lambert's equity beta is 1.30, the risk-free rate is currently 5 percent, and the market risk premium is...
1. Standard, Inc. reported EBIT of $57.00 million for last year. Depreciation expense totaled $20 million...
1. Standard, Inc. reported EBIT of $57.00 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $7 million. The company increased net working capital by $2 million. Free cash flow is expected to grow at a rate of 5.30% for the foreseeable future. Standard faces a 40% tax rate and has a 0.40 debt to equity ratio with $200 million (market value) in debt outstanding. Standard's equity beta is 1.24, the risk-free rate is currently...
1. Last week, Newtown Plastics announced that it had developed a new plastic container that is...
1. Last week, Newtown Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of a(n): pre-activity action. delayed reaction. over-reaction and correction. efficient market reaction. post-activity reaction. 2. Which one of the following statements is correct? Multiple Choice...
Ce is a piano manufacturer. The company reported net income of $50 million for the most...
Ce is a piano manufacturer. The company reported net income of $50 million for the most recent fiscal year. Cello has $1 billion in debt and paid $100 million in interest expense in the most recent financial year. The firm reported depreciation expense of $100 million in the current fiscal year, and capital expenditures were 200% of depreciation. The firm has a WACC of 11% and a constant growth rate of 4% in perpetuity. assume the market risk premium is...
In the year prior to going public, a firm has revenues of $20 million and net...
In the year prior to going public, a firm has revenues of $20 million and net income after taxes of $2 million. The firm has no debt, and revenue is expected to grow at 20% annually for the next five years and 5% annually thereafter. Net profit margins are expected remain constant throughout. Capital expenditures are expected to grow in line with depreciation and working capital requirements are minimal. The average beta of a publicly traded company in this industry...
A firm you have been asked to analyze has $250 million in market value of debt...
A firm you have been asked to analyze has $250 million in market value of debt outstanding and $750 million in equity outstanding. The debt has a Beta of 0.1 and equity has a Beta of 1.2. Assume the risk-free rate is 1% and the market premium is 7%. Assume the coupon on the debt is equal to its yield. Also assume the firm faces a 21% marginal tax rate. Which of the following describes the firm's WACC?
The BHP Corporation has debt with a market value of $55 million, preferred stock worth $3...
The BHP Corporation has debt with a market value of $55 million, preferred stock worth $3 million outstanding, and common equity with a market value of $42 million. The company’s debt yields 9.5 percent. Its preferred stock pays $6.5 per share fixed dividend and is currently priced at $50 per share. The company’s common stock has a beta of 0.90, the risk-free rate is 4 percent and the market risk premium is 8 percent. Given that BHP Corporation faces 30...
You are valuing a company that generated free cash flow of $10 million last year, which...
You are valuing a company that generated free cash flow of $10 million last year, which is expected to grow at a stable 3.0% rate in perpetuity thereafter. The company has no debt and $8 million in cash. The market risk premium is 8.4%, the risk-free rate is 2% and the firm’s beta is 1.4. There are 50 million shares outstanding. How much is each share worth according to your valuation analysis?
You are valuing a company that generated free cash flow of $10 million last year, which...
You are valuing a company that generated free cash flow of $10 million last year, which is expected to grow at a stable 3.0% rate in perpetuity thereafter. The company has no debt and $8 million in cash. The market risk premium is 8.4%, the risk-free rate is 2% and the firm’s beta is 1.4. There are 50 million shares outstanding. How much is each share worth according to your valuation analysis?
Krisko Industries generated FCFF of $430,000 last year. The firm is expected to grow at a...
Krisko Industries generated FCFF of $430,000 last year. The firm is expected to grow at a rate of 15% for the next two years. After this high growth period, the firm is expected to grow at a rate of 6% for the forseeable future. The following data applies to Krisko: Market value of debt = $3,000,000 Book value of debt = $2,800,000 Pre-tax cost of debt = 6% Bingo's beta = 1.4 Risk-free rate - 3% Market risk premium =...