Union Pacific Railroad reported net income of $770 million after interest expens
ID: 2737236 • 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
Given
Net Profit = $ 770
Tax @ 36% = $ 433.125 (770*36/(100-36))
EBT = $ 1203.125
Interest = $ 320
EBIT = $ 1523.125
Given, Capital Expenditure = $ 1200 million
Given, Working capital requirement is negligible
Given, Depreciation charge = $ 960
FCFF = EBIT(1-t) + Depreciation - Capital Expenditure - change in WC
= 1523.125*(1-0.36) + 960 - 1200 - 0
= $ 734.8 million
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