Selected Information from the Statement of Cash Flows Other data: Acme\'s market

Question

Selected Information from the Statement of Cash Flows

Other data:

Acme's market beta is currently 1.4. The risk-free rate in the economy is 2.5% and the market risk premium is expected to be 7%.Acme's cost of debt (interest rate) is 8.304%. Acme currently has 33% debt in its capital and 67% equity and it plans to stick with this capital structure in future. Acme's long-term sustainable growth in net income, residual net income, residual ROCE and free cash flows to common stockholders and free cash flows to equity and debt holders is projected to be 5% after year 2019. This is not the growth in its dividends in future because Acme expects to change its payout policy in future. For the purpose of this company's analysis, year 2016 is now, year 2017 is year+1, and so on. Acme has no preferred stock or minority interest. Acme's net income is also its comprehensive income.

What is Acme's weighted average cost of capital (WACC) according to its current capital structure?

10 points   

QUESTION 14

What is Acme's free cash flow to debt and equity stakeholders in year 2018?

10 points   

QUESTION 15

How much is Acme's free cash flow to common stockholders in year 2019?

Year 2017 2018 2019 Operating Activities Cash Flow from Operating Activities $19,480 $21,815 $20,590 Investing Activities: Fixed Assets Acquired, Net ($5,595) ($6,595) ($6,920) (Acquisition) Sale of Businesses, Net $1,605 $1,790 ($6,530) (Purchase) Sale of Investments ($3,310) ($2,030) $1,455 Cash Flow from Investing Activities ($7,300) ($6,835) ($11,995) Financing Activities: Increase (Decrease) in Short-Term Borrowing $4,410 ($6,110) $1,805 Increase (Decrease) in Long-Term Debt $1,266 $12,220 $3,380 Increase (Decrease) in Common Stock ($9,100) ($11,945) ($7,025) Dividends Paid ($6,880) ($6,901) ($6,989) Cash Flow from Financing Activities ($10,304) ($12,736) ($8,829) Net Increase (Decrease) in Cash & Equivalents $1,876 $2,244 ($234) Cash at Beginning of Year $5,360 $7,235 $9,480 Cash at End of Year $7,236 $9,479 $9,246

Explanation / Answer

WACC as per current capital structure-

Given,

We=67%

Wd = 33%

Ke = 2.5 + (1.4 x 7) = 12.3%

Kd = 8.304 ( 1-0.40) = 4.9824 %

Therefore, WACC = ( 0.33 X 4.9824 + 0.67 X 12.3) = 9.89 %(answer)

How much is Acme's free cash flow to common stockholders in year 2019-

Dividend paid = $ 6989

Buyback of common stock = $ 7025   

$ 14014 (ANSWER)

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