ABC Corp is a manufacturing company with the following information: 1. Financial Statements: • Net Income: $10 million • Depreciation: $5 million • Capital Expenditures (CapEx): $8 million • Changes in Working Capital: $2 million (increase) 2. Balance Sheet: Total Debt: $40 million (long-term debt). Total Equity: $60 million • Total Assets: $100 million 3. Market Information: • Risk - Free Rate: 3% • Market Risk Premium: 5%. Comparable Companies' Unlevered Beta: 1.0 (average of industry peers) • Tax Rate: 30% . Current Stock Price: $25 per share • Number of Shares Outstanding: 4 million 4. Assumptions: • Terminal Growth Rate: 5%. Long-term WACC: 0.25% less than the initial WACC Questions: a. Calculate the Free Cash Flow to the Firm (FCFF) for ABC Corp for the next five years. b. Determine the Cost of Equity using the Capital Asset Pricing Model (CAPM) with unlevered beta.c. Calculate the Levered Beta for ABC Corp by using the industry average unlevered beta and the company's capital structure. d. Calculate the Cost of Equity using the Capital Asset Pricing Model (CAPM) with the calculated levered beta. e. Calculate the Weighted Average Cost of Capital (WACC) for ABC Corp using the levered beta. f. Use the DCF valuation formula to estimate the intrinsic value per share for ABC Corp for the next five years, considering the calculated levered beta. g . Add the terminal value to the DCF valuation using the Gordon Growth Model with a terminal growth rate of 5%. h. Calculate the present value of the terminal value using the long - term WACC (0.25% less than the initial WACC). i. Sum the present values of the FCFF and terminal value to get the intrinsic value per share.
ABC Corp is a manufacturing company with the following information: 1. Financial Statements: • Net Income: $10 million • Depreciation: $5 million • Capital Expenditures (CapEx): $8 million • Changes in Working Capital: $2 million (increase) 2. Balance Sheet: Total Debt: $40 million (long-term debt). Total Equity: $60 million • Total Assets: $100 million 3. Market Information: • Risk - Free Rate: 3% • Market Risk Premium: 5%. Comparable Companies' Unlevered Beta: 1.0 (average of industry peers) • Tax Rate: 30% . Current Stock Price: $25 per share • Number of Shares Outstanding: 4 million 4. Assumptions: • Terminal Growth Rate: 5%. Long-term WACC: 0.25% less than the initial WACC Questions: a. Calculate the Free Cash Flow to the Firm (FCFF) for ABC Corp for the next five years. b. Determine the Cost of Equity using the Capital Asset Pricing Model (CAPM) with unlevered beta.c. Calculate the Levered Beta for ABC Corp by using the industry average unlevered beta and the company's capital structure. d. Calculate the Cost of Equity using the Capital Asset Pricing Model (CAPM) with the calculated levered beta. e. Calculate the Weighted Average Cost of Capital (WACC) for ABC Corp using the levered beta. f. Use the DCF valuation formula to estimate the intrinsic value per share for ABC Corp for the next five years, considering the calculated levered beta. g . Add the terminal value to the DCF valuation using the Gordon Growth Model with a terminal growth rate of 5%. h. Calculate the present value of the terminal value using the long - term WACC (0.25% less than the initial WACC). i. Sum the present values of the FCFF and terminal value to get the intrinsic value per share.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Transcribed Image Text:ABC Corp is a manufacturing company with the following information: 1. Financial Statements: • Net Income: $10 million • Depreciation: $5
million • Capital Expenditures (CapEx): $8 million • Changes in Working Capital: $2 million (increase) 2. Balance Sheet: Total Debt: $40
million (long-term debt). Total Equity: $60 million • Total Assets: $100 million 3. Market Information: • Risk - Free Rate: 3% • Market Risk
Premium: 5%. Comparable Companies' Unlevered Beta: 1.0 (average of industry peers) • Tax Rate: 30% . Current Stock Price: $25 per
share • Number of Shares Outstanding: 4 million 4. Assumptions: • Terminal Growth Rate: 5%. Long-term WACC: 0.25% less than the
initial WACC Questions: a. Calculate the Free Cash Flow to the Firm (FCFF) for ABC Corp for the next five years. b. Determine the Cost of
Equity using the Capital Asset Pricing Model (CAPM) with unlevered beta.c. Calculate the Levered Beta for ABC Corp by using the industry
average unlevered beta and the company's capital structure. d. Calculate the Cost of Equity using the Capital Asset Pricing Model (CAPM)
with the calculated levered beta. e. Calculate the Weighted Average Cost of Capital (WACC) for ABC Corp using the levered beta. f. Use the
DCF valuation formula to estimate the intrinsic value per share for ABC Corp for the next five years, considering the calculated levered beta. g
. Add the terminal value to the DCF valuation using the Gordon Growth Model with a terminal growth rate of 5%. h. Calculate the present
value of the terminal value using the long - term WACC (0.25% less than the initial WACC). i. Sum the present values of the FCFF and
terminal value to get the intrinsic value per share.
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