19. Which of the following statements is CORRECT? d.oimplement the corporate val

Question

19. Which of the following statements is CORRECT? d.oimplement the corporate valuation model, we disoount projected free cash fows a b. To inglement the corporato valuation model, wo do our net operating c. To implement the d. To implement e. The weighted average cost of capital. (NOPAT) at the weighted average cost of capital. weighted average cost of capital cost of equity capital years. corporate valuation model, we discount projected net income at the the corporate valuation model, we discount projected free cash flows at the corporate valuation model requires the assumption of a constant growth rate in all 20. OBrien Inc. has the following data: rw-5.00%; RPu-6.00% and b-075 what is the firm's oost of equity from retained eamings based on the CAPM? 6.90% 9.50% 10.58% 11.41% 9.20% b, c. 21. You must estimate the intrinsic value of Noe Technologies' stock. The end-of-year free cash flow (FCF,) is expected to be $24.50 million, ard it is expected to grow at a constant rate of 70% a year thereafter The company's WACC is 100% ithas S 125.0 milion of longterm debt plus preferred stock outstanding. and there are 15.0 million shares of common stock outstanding. What is the intrinsic value per share of common stock? a. $47.96 b. $46.11 c. $38.27 d. $40.12 $34.58 22. Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D $2.50), the dividend is expected to grow at a constant rate of 5 50% a year, and the common stock currently sells for SS750 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists Of 50% debt and 50% common earnings? Do not round your intermediate calculations equity. What is the company's WACC it all the equity used is from retained a b. C. d. e. 9.41% 8.72% 7.58% 9.94% 8.34%

Explanation / Answer

Question 19). Answer :- Option a). To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.

Question 20). Answer :- Option b) 9.50 %

Explanation :- Cost of equity = Risk free return + Beta * Market risk premium.

= 5.00 % + 0.75 * 6.00 %

= 5.00 % + 4.50 %

= 9.50 %

Conclusion :- Cost of equity = 9.50 % (Option b).

Question 21). Answer :- Option b) $ 46.11

Explanation :- Total value of firm = 24.50 Million / (0.10 - 0.07)

= 24.50 Million / 0.03

= $ 816.67 Million (approx).

Value of common stock = 816.67 - 125 Million (Preferred stock and Debt)

= $ 691.67 Million.

Intrinsic value per share of the common stock of firm = Value of common stock / Number of shares of common stock of firm.

= 691.67 Million / 15.0 Million

= $ 46.11

Conclusion :- Intrinsic value per share of the common stock of firm = $ 46.11 (Option b).

Question 22). Answer :-

Explanation :- Cost of equity = (Expected dividend / Price per share of common stock) + Growth in dividend

= (2.50 / 37.50) + 0.055

= 0.0667 + 0.055

= 0.1217 i.e., 12.17 % (approx).

Cost of debt (after-tax) = Cost of debt (before tax) * (1 - Tax rate).

7.50 % * (1 - 0.40)

= 4.50 %

Weighted average cost of capital = Cost of equity * Weight of equity + Cost of debt * Weight of debt

= 0.50 * 12.17 % + 0.50 * 4.50 %

= 6.085 % + 2.25 %

= 8.335 % (Rounded off to 8.34 %)

Conclusion :- Weighted average cost of capital (WACC) = 8.34 % (Option e).

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