On December 31, 2006, a stock analyst has forecasted that Hart Enterprises should generate free cash flows of $2,000 in 2007 and 2,200 in 2008 and 2,700 in 2009. Thereafter, free cash flow for Hart Enterprises is expected to grow at an annual rate of 5%. Hart Enterprises has a weighted average cost of capital (WACC) of 11%. Hart Enterprises has Notes Payable and Long-term Debt of $12,000 and no Preferred Stock. Hart Enterprises has 10,000 shares of common stock outstanding.
What is the Value of Hart Enterprises (Vcompany) (Round intermediate computations to 2 decimal points)?
a. |
$5,561.59 |
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b. |
$34,548.79 |
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c. |
$40,110.38 |
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d. |
$47,250.00 |
Given the information in the previous problem, what is the value, P0, of a share of Hart Enterprise’s stock?
If the Hart Enterprises decreases its WACC to 10%, what will happen to the value of Hart Enterprises?
a. |
The value of Hart Enterprises will increase because by decreasing its WACC, Hart Enterprises has reduced its costs of financing, and reducing costs makes a company more valuable. |
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b. |
The value of Hart Enterprises will decrease because by decreasing its WACC, Hart Enterprises will make less money, making the company less valuable. |
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c. |
The value of Hart Enterprises will not change, because the changing the WACC has no effect on value. |
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d. |
It is impossible to tell what will happen to the value of Hart Enterprises, because you are not told why the WACC changed. |
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e. |
None of the answers above is correct. |
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