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    Valuation of Company XYZ

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    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.

    Please show your work to help me understand this problem...thanks!

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    Solution Preview

    Hi,

    Get the answer with attachment.

    Answer:
    Given that,
    Net Income=$770 million
    Interest expenses=$320 million
    Corporate tax rate=36%
    Depreciation=$960 million
    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 ...

    Solution Summary

    This solution helps to find out value of firm and its equity using FCFF method. Attached as a Word question.

    $2.19