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A-I :i ,la-. | 1Normal[TAOSpa Heading 2 A Heading 1 Title Su Paragraph Question 7: Suppose you are provided with the following additional information about Motif Corp O The projected FCFF for the next five years are projected as Year The firm's WACC s l 3% After 5-years, the FCFF are expected to grow at 5% indefinitely The current market yield on preferred stocks is 10% 800 950 1020 1300 () The firm has preferred stocks which pays total dividends of $2.7 million per year indefinitely (ii) The firm also has two loans outstanding. The total interest expense on the two debts is $10 million per year. The book or balance sheet value of the first and second debt is $30 and $70 million respectively. The first and second debt has 6 and 10 years to maturity respectively You are also told that the yield of debt (with similar risk) maturing in 8-10 years is 12%. (iv) From the firm's 10K reports, the firm has operating lease expense of $25 million, $26 million, $30 million and S32.50 million for each of the next 4 years. The cost of short term financing is 5%. (v) The value of the firm's cash and marketable securities is $45 million. Projected sales and cost of sales for the coming year are $200 million and $150 million respectively. The current inventory, account receivable and accounts payable are valued at $20 million, $16 nillion and $13.25 million respectively a) What is the value of the firm? b) What is the market value of the prefetred stocks? c) What is the market value of the loans? d) What is the market value of the operating leases? asa ixces ah balaceh f What is the value of the firm to common equity investors (mark g)If the frm has 250 million common tocks, what price would you pay for each st value of equity)7 enoVO

Explanation / Answer

As per rules I am answering the first 4 sub-parts of this question

1. Value of firm in year 5 = FCF year 6/ (WACC-g)

1500*105%/ (13%-5%)

= 19687.5

Value of the firm = sum of its discounted cash flows + PV of value in year 5

= 800/1.13^1+ 950/1.13^2 + 1020/1.13^3 + 1300/1.13^4 + 1500/1.13^5 + 19687.5/1.13^5

= $14,456 million

2. Market value of prefered stock = Dividend/ Market yield

= 2.7/ 10% = $27 million

3. Weighted maturity of the loans = 30%*6 + 70%*10 = 8.8 years

Rate = 12%

Annual interest = 10 million

Using PV function in excel, market value of loans = =PV(12%,8.8,10)

= $52.59 million

4. Market value of operating leases = 25/1.05^1 + 26/1.05^2 + 30/1.05^3 +32.5/1.05^4

=100.04 million

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