Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 12, Problem 23P
Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.60, expects to generate
- a. Estimate the value of each division.
- b. Estimate Weston’s current equity beta and cost of capital. Is this cost of capital useful for valuing Weston’s projects? How is Weston’s equity beta likely to change over time?
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Weston Enterprises is an all-equity firm with two divisions. The soft drink division has an asset beta of 0.52,
expects to generate free cash flow of $49 million this year, and anticipates a 4% perpetual growth rate. The
industrial chemicals division has an asset beta of 1.09, expects to generate free cash flow of $74 million this
year, and anticipates a 3% perpetual growth rate. Suppose the risk-free rate is 2% and the market risk premium
is 5%.
a. Estimate the value of each division.
b. Estimate Weston's current equity beta
c. Estimate Weston's current cost of capital. Is this cost of capital useful for valuing Weston's projects? How is
Weston's equity beta likely to change over time?
***
a. Estimate the value of each division.
The cost of capital for the soft drink division is%. (Round to two decimal places.)
Suppose Alcatel-Lucent has an equity cost of capital of 10.2%, market capitalization of $11.20 billion, and an
enterprise value of $14 billion. Assume Alcatel-Lucent's debt cost of capital is 6.5%, its marginal tax rate is 33%, the
WACC is 9.03%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free
cash flow, debt capacity, and interest payments are shown in the table:
a. What is the free cash flow to equity for this project?
b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the
WACC method?
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Year
FCF ($ million)
D=dxv
Interest
0
1
2
3
- 100
55
103
74
38.84
31.34
13.57
0.00
0.00
2.52
2.04
0.88
to
Suppose Alcatel-Lucent has an equity cost of capital of 9.5%, market capitalization of $11.84 billion, and an
enterprise value of $16 billion. Assume Alcatel-Lucent's debt cost of capital is 6.8%, its marginal tax rate is 35%, the
WACC is 8.18%, and it maintains a constant debt-equity ratio. The firm has a project with average risk. Expected free
cash flow, debt capacity, and interest payments are shown in the table
a. What is the free cash flow to equity for this project?
b. What is its NPV computed using the FTE method? How does it compare with the NPV based on the
WACC method?
Data table
af
(Click on the following icon in order to copy its contents into a spreadsheet.)
Year
0
1
2
100
48
103
FCF ($ million)
D=dxV
49.21
40.75
Interest
0.00
3.35
17.31
2.77
3
72
0.00
1.18
- X
Chapter 12 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - What data can we use to estimate the beta of a...
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Consider the setting of Problem 18. You decided to...Ch. 12 - Prob. 20PCh. 12 - In mid-2015, Cisco Systems had a market...Ch. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...
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