Question

Prokter and Gramble​ (PKGR) has historically maintained a​ debt-equity ratio of approximately 0.23. Its current stock price is $53 per​ share, with 2.9 billion shares outstanding. The firm enjoys very stable demand for its​ products, and consequently it has a low equity beta of 0.575 and can borrow at 3.7% just 20 basis points over the​ risk-free rate of 3.5%.The expected return of the market is10.1%, and​ PKGR's tax rate is 35%

a. This​ year, PKGR is expected to have free cash flows of ​$5.6 billion. What constant expected growth rate of free cash flow is consistent with its current stock​ price?

b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher​ debt-equity ratio of 0.575 it believes its borrowing costs will rise only slightly to 4.0%.If PKGR announces that it will raise its​ debt-equity ratio to0.575 through a leveraged​ recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings

Answer 1

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