1. Compute the Cost of Equity for XYZ Inc. 2. Compute the WEIGHTED AVERAGE after
ID: 2785634 • Letter: 1
Question
1. Compute the Cost of Equity for XYZ Inc.
2. Compute the WEIGHTED AVERAGE after-tax cost of debt (short term and long term combined) for XYZ Inc.
3. Compute the Weights for Short Term Debt, Long Term Debt and Equity.
4. Compute the Weighted Average Cost of Capital
5. Calculate the Free Cash Flow for the next three years
6. Use the Free Cash Flow Method to compute the value of XYZ Inc. (assume there are no non-operating assets).
7. Based on the Free Cash Flow Valuation, compute the Value of XYZ’s equity and the estimated price per share.
You are given the following information about Company XYZ below from 2016: $(thousands) A/P Accruals Notes Payable Long Term Debt Common Stock 2016 1,200 1,300 1,500 1,000 2,500 Retained Earnings 3,000 # Shares Outstanding (thousands) Current Market Price 200 $15.00 EBIT 450.00 N.O.W.C 600.00 Net Fixed Assets 1,200.00 Bond Info Coupon Rate (Paid Annual) Time to Maturity Face Outstanding Price Bond Type (Years) Bond A Short Term Bond B- Long Term Bond C-Long Term S (thousands) 1,500 500 500 0.00% 4.00% 5.00% | $980.00 | $1,050.00 | $975.00 5 10 Tax Rate 30% Additionally, you believe that EBIT will grow at a rate of 5% over the next 3 years, N.Ow.c. will need to grow 4% for the next three years and Net Fixed Assets will grow at 2% for the next three years Afterwards, you believe Free Cash Flow to grow at a rate of 2% per year. XYZ Inc. has a Beta estimated to be 1.3, the market risk premium is estimated to be 8% p.a. and the risk free rate is estimated to be 1% p.a.Explanation / Answer
1) Cost of Equity = Risk Free Rate + Beta * Market Risk Premium
= 1% + 1.3 * 8% = 11.4%
2) The Weighted Average Cost of Debt is as follows:
(0 % * 1500*980/2482500) + (4% * 500* 1050/2482500) + (5% * 500* 975/2482500) = 1.83%
After Tax Cost of Debt = 3.02% * (1 -0.3) = 1.28%
(Note : We use Market Values to calculate the weights. Total Market value of Debt = 1500* 980 + 500*1050 + 500*975 = 2482500)
3) Total Market Value of Debt and Equity = 1500* 980 + 500*1050 + 500*975 + 200*15 = 2485500
Thus we get, the weights as
Short Term debt = 1500* 980 / 2485500 = 0.59
Long term debt = (500*1050 + 500*975)/2485500 = 0.41
Equity = 200 * 15 / 2485500 = 0.0012
(Since it is not mentioned specifically which all questions need to be answered I am answering first 3)
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