Suppose you are assigned the task of finding the theoretical value of Firm ABC.
ID: 2728692 • Letter: S
Question
Suppose you are assigned the task of finding the theoretical value of Firm ABC. Firm ABC has the following capital structure:
The common stock just paid a dividend of $2.23 and they expect short-term growth of 8% for the first three years, followed by a constant growth rate of 4% thereafter. The coupon bonds pay a 7% coupon rate, semiannually and have 13 years left until maturity. The preferred stock pays a 4% dividend and a face value of $100. The zero coupon bonds have 24 years left until maturity and are compounded semiannually. Both of the bonds have face value of $1,000. Finally, the required rates of return are as follows for each.
What total value would you put on the firm?
Common Stock 45,000 shares Coupon Bonds 2,400 shares Preferred Stock 22,000 shares Zero Coupon Bonds 1,100 bondsExplanation / Answer
Firm ABC All Amounts in $ To find the value of the firm, we need to calculate the values of each item in the capital structure A = Common Stock Value of Dividend at the end of 4 years Dividend per share Year 2.23 0 2.4084 1 2.601072 2 2.80915776 3 2.92152407 4 Since the cost of common stock as given is 11.40%, the value per share of common stock will be $ 2.92152407 / 11.40% = 25.63 $ The value of 45,000 shares of common stock will be 45,000 X $ 25.63 = 1153233 $ B = Coupon Bonds Based on the information given, the market price of the coupon bonds works out to $ 975.085 The market value for 2,400 shares will be 2,400 X $ 975.085 = 2340204 $ C = Preferred Stock Market Price of the preferred stock = 100 X 4 / 4.10 = 97.56 $ The market value for 22,000 shares will be 22,000 X $ 97.56 = 2146341 $ D = Zero Coupon Bonds Based on the information given, the market price of the zero coupon bonds works out to $ 591.486 The market value for 1,100 bonds will be 1,100 X $ 591.486 = 650635 $ Total Value of the Firm = A + B + C + D = 6290413 $