X is a manufacturer of appliances. In the most recent year, the firm reported after-tax operating income of $20 million
Posted: Mon May 02, 2022 8:56 am
X is a manufacturer of appliances. In the most recent year, the
firm reported after-tax operating income of $20 million and net
operating assets of $16 million; the firm had debt (net financial
obligations) of $6 million and an equity-to-debt ratio of 3.3
during the year. The firms’ after-tax operating income and net
operating assets are expected to grow at 6% for the next 3 years
after which the free cash flow to firm is expected to grow at a
stable rate of 4% annually. The unlevered beta for X is 0.8.
The tax rate is 25%, the Treasury bond rate is 3%, and the market
risk premium is 6%.
a.Estimate the cost of equity for X
b.Assume that X has 12 million shares outstanding and its weight
average cost of capital is 7%, estimate the equity value per share
of the company using the discounted cash flow model.
firm reported after-tax operating income of $20 million and net
operating assets of $16 million; the firm had debt (net financial
obligations) of $6 million and an equity-to-debt ratio of 3.3
during the year. The firms’ after-tax operating income and net
operating assets are expected to grow at 6% for the next 3 years
after which the free cash flow to firm is expected to grow at a
stable rate of 4% annually. The unlevered beta for X is 0.8.
The tax rate is 25%, the Treasury bond rate is 3%, and the market
risk premium is 6%.
a.Estimate the cost of equity for X
b.Assume that X has 12 million shares outstanding and its weight
average cost of capital is 7%, estimate the equity value per share
of the company using the discounted cash flow model.