Purchase Solution

Stock Valuations

Not what you're looking for?

Ask Custom Question

Reuth Corporation is interested in acquiring Hyatt Corporation. Hyatt has 5 million shares outstanding and a target capital structure consisting of 35 percent debt. Reuth's debt interest rate is 10 percent. Assume that the risk-free rate of interest is 2 percent and the market risk premium is 8 percent.

Hyatt's free cash flow (FCF0) is $5 million per year and is expected to grow at a constant rate of 5 percent a year; its beta is .9. Hyatt has $10 million in debt. The tax rate for both companies is 30 percent.

a. Calculate the required rate of return on equity using equation: rs= KRF + 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, using equation: Price per share = Vs/shares outstanding

Purchase this Solution
Solution Summary

Solution describes the steps for calculating required rate of return ,WACC, value of operations, value of equity and current value of comany's stock.

Solution Preview

Solution:

a. Calculate the required rate of return on equity using equation: rs= KRF + RPM(b)
Krf=risk free return=2%
RPM=Market risk premium=8%
CAPM model gives us
Ke=Krf+Beta*(Market risk premium)=2%+0.9*8%=9.20%

b. Calculate weighted ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Learning Lean

This quiz will help you understand the basic concepts of Lean.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

View More Free Quizzes
Related BrainMass Solutions

  • Discuss: Sarbanes-Oxley Act

    520860 Discuss: Sarbanes-Oxley Act Critics of the Sarbanes-Oxley Legislation argue that SOX 404 reduces the stock valuations of small firms. Question: What is SOX 404? Specifically, how could SOX 404 reduce the stock valuations of small firms?

  • Financial Viability Sprint Nextel

    These factors include, but are not necessarily limited to financial statement analysis, financial ratio trends and industry comparatives, capital spending, stock growth, Beta values, credit rating service valuations, bond rating valuations, and management

  • Zero growth valuation models

    There are three short solution type problems on earning-based equity valuations.

  • Valuation of Facebook Requirements

    The valuations of Facebook requirements are examined.

  • Constant Growth Valuation

    The required rate of return on the stock, rs , is 15%. What is the value per share of the company's stock? Stock Price = Dividend / ( required rate of return - growth rate) = $1.5 / (15% - 7%) = $18.75 Constant growth valuations are examined.

  • Rolen Riders Preferred Stock Valuation

    b) now the preferred stock yields 12%. Vp = $10 / 0.12 = $83.33. Rolen Riders preferred stock valuations are examined.

  • Constant Growth Valuation for Harrison Clothiers

    Thanks The solution analyzes constant growth valuations for Harrison Clothiers stock. The stock price expected 1 year from now is determined as well as the required rate of return.

  • Stock Valuations

    191084 Stock Valuations Calculate the book value per share based on the reported stockholders' equity account for Bridgford Foods in fiscal year ending November 2, 2005: Shareholders' equity ('000) Preferred stock, without par value Authorized

  • Boehm Incorporated Constant Growth Valuation

    The required rate of return on the stock, r, is 15%. What is the value per share of Boehm's stock?

  • Stock Split and Stock Dividend Valuations

    513534 Stock Split and Stock Dividend Valuations Roll Corporation (RC) currently has 159,000 shares of stock outstanding that sell for $56 per share. Assume no market imperfections or tax effects exist.

View More Related Solutions