Question

Please post equations for learning and study, please.  

1. Cook Wares has a target debt ratio (debt/value) of 60%. The 10-year bonds have a coupon rate of 8.3% (paid annually) and a yield to maturity of 7.2%. Tax rate is 25%. The cost of equity is 14.8%.

1. Calculate the weighted average cost of capital.
2. The firm has a 3-year planning period. The firm expects cash flows of $6M next year, and the cash flows will initially grow at 10%. After year 3, they estimate that the cash flows will grow at 2% indefinitely. Find the value of the operations.
3. The firm has $8M in cash, $2M in debt and 5M shares outstanding. Find the share price.

Answer 1

Solution a: Calculation of WACC Cost Effective Cost Weight B Effective Cost А 5.40% 14.80% Total WACC 7.20% 7.20%*(1-25%) 14.80% 14.8%*(1-0) Total capital Weighted cost C=A*B 60.00% 3.24% 40.00% 5.92% 9.16% Debt Equity

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Solution b&c: Year 1 Cash Flow Growth rate computation Cash Flow $ 6.00 10.00% 6*(1+10%) $ 6.60 10.00% 6.6*(1+10%) $ 7.26 $103.42 Cash Flow PV factor @9.16%, * PV 1/(1+r)^time factor 0.9161 $ 5.50 0.8392 $ 5.54 0.7688 $ 5.58 0.7688 $ 79.51 Current Firm value 96.13 2 3 3 $ HA Current Cash Flow Rate of return Growth Rate 7.26 9.16% 2.00% Firm value at the horizon i.e. T3 =Current Cash Flow*(1+Growth rate)/(rate of return-Growth rate) Firm value at the horizon i.e. T3 103.424581 Firm value at the horizon i.e. T3 $ 103.42 Firm value $ 96.13 FROM above table Value of operations Cash Debt value Equity value No of shares Share price per share Share price per share $ $ $ $ 96.13 million 8.00 million (2.00) million 102.13 million 5.00 million 20.426 20.43 $