Randall and Arts Inc. has an expected net operating profit after taxes, EBIT(1-T
ID: 2759259 • Letter: R
Question
Randall and Arts Inc. has an expected net operating profit after taxes, EBIT(1-T), of $3,200 million in the coming year. In addition, the firm is expected to have net capital expenditures of $480 million, and net operating working capital (NOWC) is expected to increase by $35 million.
FCF expected to be generated over the next year is $2,685 million.
Randall and Arts Inc.’s FCFs are expected to grow at a constant rate of 4.98% per year in the future. The market value of Randall and Art’s Inc.’s outstanding debt is $12,131 million, and preferred stocks’ value is $6,739 million. Randall and Arts Inc. has 525 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 14.94%. What is the:
1. Total firm value
a) $17,971.89
b) $26,957.83
c) $81,203.11
d) $53,915.66
2. Value of common equity
a) $14,826.83
b) $8,087.83
c) $14,301.83
d) $20,218.83
3. Intrinsic value per share
a) $38.51
b) $27.24
c) $15.41
d) $28.24
Explanation / Answer
1. FCF of next year (F1)= $2685 million Growth Rate (g) = 4.98% WACC (Kc) = 14.94% Value of Firm = F1 / Kc - g) = 2685 / ( 0.1494 - 0.0498) = 2685 / 0.0996 = $26,957.83 million Hence, the correct answer is Option B - $26,957.83 million 2. Value of Firm = Value of Debt + Value of Preferred Stock + Value of Common Stock or, 26957.83 = 12131 + 6739 + Value of Common Stock / Equity or, Value of Equity = 26957.83 - 12131 -6739 = $8087.73 Hence, the correct answer is Option B - $8,087.83 million 3. Intrinsic Value per share = Value of Equity / Number of shares outstanding = 8087.83m / 525m = $15.41 Hence, the correct answer is Option C - $15.41 per share
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