Could you please provide step by step answers for these questions. The questions
ID: 2699223 • Letter: C
Question
Could you please provide step by step answers for these questions. The questions are located on pages 131&132.
6.2: BrandCo currently has 50 million shares outstanding. If BrandCo%u2019s shares are trading at $19.16 per share, what is the company%u2019s market capitalization (value of equity)? Assuming the market value of debt equals today%u2019s book value of debt, and what percentage is attributable to equity? Using these weights, compute the weighted average cost of capital. Assume the pretax cost of debt is 8 percent, the cost of equity is 12 percent, and the marginal tax rate is 25 percent.
6.3: Using free cash flow computed in Question 1 and the weighted average cost of capital computed in Question 2, estimate BrandCo%u2019s enterprise value using the growing-perpetuity formula. Assume free cash flow grows at 5 percent.
6.5: What are the three components required to calculate economic profit? Determine BrandCo%u2019s economic profit in year 1.
Thank you
Explanation / Answer
Value of Equity = total dollar market value of all of a company's outstanding shares = 50 * 19.16 = $ 958 million
Market value of Debt = $ 200 million ;
Weight of Equity = 958 /(958 + 200) = 82.73 %
Weight of Debt = 100 - 82.73 = 17.27 %
WACC = We*Re + Wd*Rd*(1-T) = 0.8273*12 + 0.1727*8*(1-0.25) = 10.964 %