Question 7: Suppose you are provided with the following additional information a
ID: 2803051 • Letter: Q
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Question 7: Suppose you are provided with the following additional information about Motif Corp. 1) The projected FCFF for the next five years are projected as follows: Year FCFF (Smillion) 800 950 1020 1300 1500 The firm's WACC is 13%. After 5-years, the FCFF are expected to grow at 5% indefinitely (i) The firm has preferred stocks which pays total dividends of $2.7 million per year indefinitely. The current market yield on preferred stocks is 10%. (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%. From the firm's 10K reports, the firm has operating lease expense of $25 million, $26 million, $30 million and $32.50 million for each of the next 4 years. The cost of short term financing is 5%. 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 million and $13.25 million respectively (iv) (v) Requtred a) What is the value of the firm? b) What is the market value of the preferred stocks? c) What is the market value of the loans? d) What is the market value of the operating leases? e) What is the firm's minimum cash balance to sustain operations and the excess cash balance? f) What is the value of the firm to common equity investors (market value of equity)? g) If the firm has 250 million common stocks, what price would you pay for each stock?Explanation / Answer
As per rules I am answering the first 4 sub-parts of this question
a. Value of the firm = Value of discounted cash flows + PV of value of the firm as on end of year 5
Value of firm at the end of year 5 =
(FCF5x (1 + g)) / (WACC – g)
= 1500*105%/ (13%-5%)
= 19687.5
Value of the firm = 800/1.13^1 + 950/1.13^2 + 1020/1.13^3 + 1300/1.13^4 + 1500/1.13^5 + 19687.5/1.13^5
=$ 14455.91 million
b. Market value of preference shares = $2.7 million/ 10% = $27 million
c.
We first compute the weighted average maturity of debt as 6 years * 30/100 + 10years * 70/100
= 8.8 years
The market value of debt = C[(1 – (1/((1 + Kd)^t)))/Kd] + [FV/((1 + Kd)^t)]
Where C = 10 million
Kd = 12%
T = 8.8 years
FV = 30+70 = 100 million
Market value of debt = 10*(1- (1/1.12^8.8)/0.12) + [100/1.12^8.8]
= $89.48 million
d. Market value of leases = PV of discounted cash flows
= 25/1.05^1 + 26/1.05^2 + 30/1.05^3 + 32.5/1.05^4
= $100.04 million
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