Union Pacific Railroad reported net income of $770 million after interest expens
ID: 2735289 • Letter: U
Question
Union Pacific Railroad reported net income of $770 million after interest expenses of $320 million in a recent financial year. (The corporate tax rate was 36 percent.) It reported depreciation of $960 million in that year, and capital spending was $1.2 billion. The firm also had $4 billion in debt outstanding on the books, was rated AA (carrying a yield to maturity of 8 percent), and was trading at par (up from $3.8 billion at the end of the previous year). The beta of the stock is 1.05, and there were 200 million shares outstanding (trading at $60 per share), with a book value of $5 billion. Union Pacific paid 40 percent of its earnings as dividends and working capital requirements are negligible. (The Treasury bond rate is 7 percent.)
a. Estimate the FCFF for the most recent financial year.
b. Estimate the value of the firm now.
c. Estimate the value of equity and the value per share now.
Explanation / Answer
a.
Working:
FCFF = Earning before Interest and taxes*(1-tax) + Depreciation + Capital expenditure + Change in working capital = 1523*(1-.36) + 960 + 1200 + 0 = 974.72 + 960 + 1200 + 0 = 3135 Thus, FCFF is $ 3,135 million.Related Questions
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