Question

XYZ Corporation has $200M in debt that yields 8%, its stock trades at $20/share and there are 20M shares outstanding. The book value of equity is $300M. XYZ's beta is 1.3. The risk free rate is 3.0% and the the market risk premium is 6%. Their EBIT was $100M. They had $50M of Depreciation (no Amortization), $20M of interest expense and taxes of $20M. Assume that tax rates will be the same in the future as they have been in the past. They have no cash. a. What is the cost of equity? b. What is the cost of debt? C. What is the Weighted Average Cost of Capital? d. What is their P/E Ratio? e. What is their Enterprise Value? f. What is their EV/EBITDA Ratio?

Answer 1

a)

Cost of Equity, ke = Risk free rate + Beta * Market risk premium = 3% + 1.3 * 6% = 10.8%

b)

Cost of Debt,kd = YTM of the debt = 8%

c)

MV of Debt = $ 200 M

MV of Equity = Price per share * No of shares O/S = 20 * 20 M = $ 400 M

Weight of debt, Wd = 200/.(200 + 400) = 1/3

Weight of Equity , We = 2/3

Tax rate = (Taxes/EBT) = 20/(100-20) = 20/80 = 25%

Weighted average cost of debt (WACC) = kd * Wd *(1-t) + Ke * We = 8%*1/3*(1-25%) + 10.8% * 2/3 = 9.2%

d)

P/E ratio = Price to Earnings ratio = Market Price /Earnings per share

EBIT = 100 M

EBT = EBIT - Interest = 100 - 20 = 80

Net Profit = EBT - Taxes = 80 - 20 = $ 60 M

EPS = 60 M/20 M shares = 3

P/E ratio = 20/3 = 6.67 times

e)

Enterprise Value, EV = MV of Debt + MV of Equity = 200 + 400 M = 600 M

f)

EV/EBITDA = EV/(EBIT +Depreciation) = 600/(100 + 50) = 4 times