Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Transcribed Image Text:Amarindo, Inc. (AMR), is a newly public firm with 9.0 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to $14.58 million, and you expect the firm's free cash flows to grow by 3.9% per year in subsequent years. Because the firm
has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR's equity beta. However, you do have beta data for UAL, another firm in the same industry: AMR has a much lower debt-equity ratio of 0.45, which is expected to remain stable, and its
debt is risk free. AMR's corporate tax rate is 20%, the risk-free rate is 5.2%, and the expected return on the market portfolio is 10.8%.
a. Estimate AMR's equity cost of capital.
b. Estimate AMR's share price.
a. Estimate AMR's equity cost of capital.
The equity cost of capital is%. (Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Equity Beta
2.25
UAL
Print
Debt Beta
0.45
Done
Debt-Equity Ratio
1.5
X
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