I have tried and tried to figure out these questions, can anyone please help? A
ID: 3143104 • Letter: I
Question
I have tried and tried to figure out these questions, can anyone please help?
A firm has a Capital Structure as follows:
The market value of the firm’s bonds is $2,000,000,
The market value of Preferred Stock is $1,000,000.
Firm has 500,000 shares of common stock (equity) outstanding, selling at $20 per share.
The preferred stock price is $50 and pays a $4 dividend. The common stock sells for $20 and pays a $1.00 dividend that is expected to grow by 2% per year. The price of the bonds is $818, and the coupon rate is 5%. The bonds will mature in 10 years.
The firm’s tax rate is 40%. The company generates $2,500,000 is sales, expenses are $1,000,000. The initial investment of $5,000,000 is depreciated straight-line over 10 years.
What is the market value of the equity? _____________________ Chapter 4 (hint you need to calculate market capitalization of the equity)
What is the market value of the entire firm including preferred stock and bonds? ______________________________________________________Chapter 9
What is the cost (% required rate of return) of the preferred stock? ______________________________________________________ Chapter 7
What is the cost (% required rate of return) of the common stock? _______________________________________________________Chapter 7
What is the cost (% yield to maturity) of the bonds? _______________________________________________________Chapter 6
What is the firm’s WACC? ________________________________Chapter 13
What is the firm’s OCF ___________________________________Chapter 9
What is the NPV, using the WACC (answer from question 6), and OCF (answer to question 7)? ____________Chapter 8
Explanation / Answer
(1)
Market Value of Preference Shares = 10,00,000
Market Value of Equity Shares = 1,00,00,000
Market Value of Debt = 20,00,000
Market Capitalization 1,30,00,000
(2)
Cost of preferred Stock = 8.00%. (4/50)
(3)
Cost of Common Stock = 7.10%
((1+2%)/20)+2%
(4)
Cost of Bonds = 3.00%
5%*(1-40%)
(5)
WACC = 6.54%
(1,000,000/13,000,000)*8.00%+(10,000,000/13,000,000)*7.10%+(2,000,000/13, 000,000)*3.00%
(6)
Profit before depreciation = 40,00,000
Less: Depreciation = 10,00,000
30,00,000
Less: Taxes. = 12,00,000
18,00,000
Add: Depreciation. 10,00,000
Operating Cash Flows (OCF) 28,00,000
(7)
Years. Cash Flow PVF @ 6.54%. PV @ 6.54%
0 -1,00,00,000. 1.0000. -1,00,00,000.00
1 28,00,000 0.9386. 26,28,120.89
2 28,00,000 0.8810. 24,66,792.65
3 28,00,000. 0.8269 23,15,367.61
4 28,00,000 0.7762. 21,73,237.86
5 28,00,000. 0.7285 20,39,832.79
Total. 16,23,351.81
NPV = 16,23,351.81
(8)
Years Cash Flow PVF @ 12% PV @ 12% PVF @ 13%. PV @ 13%
0. -1,00,00,000. 1.0000. -1,00,00,000.00. 1.0000. -1,00,00,000.00
1. 28,00,000 0.8929 25,00,000.00 0.8850 24,77,876.11
2. 28,00,000. 0.7972. 22,32,142.86. 0.7831. 21,92,810.71
3. 28,00,000 0.7118. 19,92,984.69. 0.6931 19,40,540.45
4 28,00,000 0.6355. 17,79,450.62 0.6133 17,17,292.44
5. 28,00,000 0.5674 15,88,795.20 0.5428 15,19,727.82
93,373.37 -. 1,51,752.47
IRR = 12.38%.
(12% + (93373.37*(13%-12%)/(93373.37-151752.47))
(9)
Yes.
(10)
As, IRR is greater than WACC and NPV is positive.