Selected Information from the Statement of Cash Flows Other data: Acme\'s market

Question

Selected Information from the Statement of Cash Flows

Other data:

Acme's market beta is currently 1.4. The risk-free rate in the economy is 2.5% and the market risk premium is expected to be 7%.Acme's cost of debt (interest rate) is 8.304%. Acme currently has 33% debt in its capital and 67% equity and it plans to stick with this capital structure in future. Acme's long-term sustainable growth in net income, residual net income, residual ROCE and free cash flows to common stockholders and free cash flows to equity and debt holders is projected to be 5% after year 2019. This is not the growth in its dividends in future because Acme expects to change its payout policy in future. For the purpose of this company's analysis, year 2016 is now, year 2017 is year+1, and so on. Acme has no preferred stock or minority interest. Acme's net income is also its comprehensive income.

What is Acme's cost of common stock according to its current capital structure?

9.50%

12.30%

10.06%

10.80%

10 points   

QUESTION 12

What is Acme's unlevered beta?

1.400

2.090

0.938

1.081

Year 2017 2018 2019 Operating Activities Cash Flow from Operating Activities $19,480 $21,815 $20,590 Investing Activities: Fixed Assets Acquired, Net ($5,595) ($6,595) ($6,920) (Acquisition) Sale of Businesses, Net $1,605 $1,790 ($6,530) (Purchase) Sale of Investments ($3,310) ($2,030) $1,455 Cash Flow from Investing Activities ($7,300) ($6,835) ($11,995) Financing Activities: Increase (Decrease) in Short-Term Borrowing $4,410 ($6,110) $1,805 Increase (Decrease) in Long-Term Debt $1,266 $12,220 $3,380 Increase (Decrease) in Common Stock ($9,100) ($11,945) ($7,025) Dividends Paid ($6,880) ($6,901) ($6,989) Cash Flow from Financing Activities ($10,304) ($12,736) ($8,829) Net Increase (Decrease) in Cash & Equivalents $1,876 $2,244 ($234) Cash at Beginning of Year $5,360 $7,235 $9,480 Cash at End of Year $7,236 $9,479 $9,246

Explanation / Answer

1. cost of equity = Ke + beta*risk premium = 2.5% + 1.4*7% = 12.3%

2. Unlevered beta = levered beta / [ 1 + (1-t)*D/E ] = 1.4/[1+ 0.6*0.33/0.67 ] = 1.081

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.