CONSIDER:
In Period 1 (at the end of the period):
Net Income = 300
Interest Expense = 100
Depreciation = 40
Cap Ex = 43
Net Increases to Working Capital = 10
Cash Flow to Invested Capital = NI + D&A - Cap Inv + Interest Exp – Net Add to Work Cap
CFIC = 300 + 40 – 43 + 100 – 10
CFIC = 387
NOW CONSIDER:
CF1 = 387
CF2 = 1.333 x CF1 = 515.871
CF3 = 1.25 x CF2 = 644.83875
Debt = 2,200
D/E (books) = 0.8
The firm has 150 shares of stock issued and outstanding.
Spot price of stock was $45 per share at last business day close.
Long-term sustainable growth is then 2.3% going forward from there.
Equity Risk Premium = 6%
Risk Free Rate = 2%
Beta = 1.25
Cost of Debt = Interest Expense/Debt = 100/2200 = 4.545%
Cost of Equity = RFR + Beta x ERP = .02 + (1.25 x .06) = 9.5%
Corporate Tax = 30%
WACC (discount rate) = 6.69%
Using end-of-year discounting:
What is the intrinsic value of Equity?
a. 11,733
b. 2,050
c. -1,200
d. 0
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