Company C reported net income of $770 million after interest expenses of $320 mi

Question

Company C reported net income of $770 million after interest expenses of $320 million in a recent financial year. (The corporate tax rate BEING 36 percent.) It reported depreciation of $960 million in that year, and capital spending was $1.2 billion. The firm also had $4 billion in debt outstanding on the books, was rated AA (carrying a yield to maturity of 8 percent), and was trading at par (up from $3.8 billion at the end of the previous year). The beta of the stock is 1.05, and there were 200 million shares outstanding (trading at $60 per share), with a book value of $5 billion. Company C paid 40 percent of its earnings as dividends and working capital requirements are negligible. (The Treasury bond rate is 7 percent.) the market risk premium is 5.5% a. Estimate the value of the firm now. b. Estimate the value of equity and the value per share now.

Explanation / Answer

Re = Rf +(Rm-Rf) X B Re = 7+5.5x 1.05 Re = 12.775 Kd = Intt. Rate x (1-t)       = 8 x (1-0.36) 5.12 WACC = W(Market Value) Cost of capital(X) w x X Debt 4000 5.12 20480 Equity 12000 12.775 153300 16000 173780 WACC = 173780/16000= 10.861% FCFF - NOPAT - Net Investment Net investment = Capital spending - Depreciation Net investment = 1200 -960 = 240 NOPAT - Net income 770 Add: Tax @ 36% (770 x 0.36/(1-0.36) 433.125 EBT 1203.125 Add : Interest 320 EBIT 1523.125 Less: tax @ 36% 548.325 NOPAT - 974.8 Therefore FCFF = 974.8 - 240 = 734.8 Value of Firm = FCFF/WACC = 6765.335 Less ; Value of Debt = 4000 Value of equity 2765.335 No. of shares 200 Value per share 13.82668 Please provide feedback… Thanks in Advance :-)

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