Analysts forecast Power Puff to generate $110 million of free cash flow at the end of the current year. (Assume that cash flows occur on December 31 and today is January 1.) Analysts also expect Power Puff's cash flow to grow at 2% in perpetuity. Power Puff has no debt and its shareholders require a return of 11.5%. There are 175 million shares outstanding and the shares trade for $6.62. Power Puff has announced a stock repurchase. It intends to buy shares at a price of $7 per share. The repurchase will be debt financed. Assume that Power Puff is aiming to maintain a debt to value ratio of 40%. The cost of debt is 5.25% and the tax rate is 30%. A) What is the Value of the Levered company? (Select from A, B, C) B) What will the stock price be after the repurchase? (Select from D, E, F) Select 2 correct answer(s) A) $1321 M B) $1240 M C) $1559 M D) $7.15 E) $6.91 F) $6.62
Analysts forecast Power Puff to generate $110 million of free cash flow at the end of the current year. (Assume that cash flows occur on December 31 and today is January 1.) Analysts also expect Power Puff's cash flow to grow at 2% in perpetuity. Power Puff has no debt and its shareholders require a return of 11.5%. There are 175 million shares outstanding and the shares trade for $6.62. Power Puff has announced a stock repurchase. It intends to buy shares at a price of $7 per share. The repurchase will be debt financed. Assume that Power Puff is aiming to maintain a debt to value ratio of 40%. The cost of debt is 5.25% and the tax rate is 30%. A) What is the Value of the Levered company? (Select from A, B, C) B) What will the stock price be after the repurchase? (Select from D, E, F) Select 2 correct answer(s) A) $1321 M B) $1240 M C) $1559 M D) $7.15 E) $6.91 F) $6.62
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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12.
Transcribed Image Text:Analysts forecast Power Puff to generate $110 million of free cash flow at the end of
the current year. (Assume that cash flows occur on December 31 and today is January
1.) Analysts also expect Power Puff's cash flow to grow at 2% in perpetuity. Power
Puff has no debt and its shareholders require a return of 11.5%. There are 175 million
shares outstanding and the shares trade for $6.62. Power Puff has announced a stock
repurchase. It intends to buy shares at a price of $7 per share. The repurchase will be
debt financed. Assume that Power Puff is aiming to maintain a debt to value ratio of
40%. The cost of debt is 5.25% and the tax rate is 30%.
A) What is the Value of the Levered company? (Select from A, B, C)
B) What will the stock price be after the repurchase? (Select from D, E, F)
Select 2 correct answerts)
A) $1321 M
B) $1240 M
C) $1559 M
D) $7.15
E) $6.91
F) $6.62
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