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    Computing the Value of Operations and Equity

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    FINC 5880
    Session 9
    Shares outstanding 10,000,000 FCF0 5,000,000
    Target debt in capital structure 30% Constant growth rate 6%
    Debt interest rate 8% Beta 1.2
    rRF 3% Amount of debt 5,000,000
    Market risk premium 7%
    Tax rate 30%

    a. Calculate the required rate of return on equity using equation: rs= rRF + RPM(b)

    b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs

    c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g)

    d. Calculate the value of the company's equity, using equation: Vs = Vops - debt

    e. Calculate the current value of the company's stock.

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    Solution Summary

    This solution takes the student through the process of finding the value of each share outstanding by computing the cost of equity using the Capital Asset Pricing Model, the after-tax cost of debt, the weighted-average cost of capital, the value of operations, the value of equity, and finally the value of each share. It is very comprehensive.