Company XYZ reported net income of $770 million after interest expenses of $320 million in a recent financial year. (The corporate tax rate was 36 percent.) It reported depreciation of $960 million in that year, and capital spending was $1.2 billion. The company also had $4 billion in debt outstanding on the books, was rated AA (carrying a yield to maturity of 8%), and was trading at par (up from $3.8 billion at the end of the previous year). The beta of the stock is 1.05, and there were 200 million shares outstanding (trading at $60 per share), with a book value of $5 billion. Company XYZ paid 40% of its earnings as dividends and working capital requirements are negligible. (The Treasury bond rate is 7%)
a. Estimate the FCFF for the most recent financial year.
b. Estimate the value of the company now.
c. Estimate the value of equity and the value per share now.
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Net Income=$770 million
Interest expenses=$320 million
Corporate tax rate=36%
Capital Spending=$1.2 billion
Debt outstanding (Book)=$4 billion
YTM on the bond=8%
Par value of the bond=$3.8 billion
Beta of stock=1.05
Number of shares ...
This solution helps to find out value of firm and its equity using FCFF method. Attached as a Word question.