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Net advantage to leasing & Valuing stocks of a company

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Question . The last free cash flow for a company was $51 million and it is expected it to grow at a constant rate of 4 percent indefinitely. The company's weighted average cost of capital is 12 percent. The company has 25 million shares of outstanding stock, and the current price per share is $28.50.
a. Calculate the company's free cash flow for next year.
b. Calculate the value of the company's operations.
c. Calculate the value of one share of the company's stock.
d. Is the company's stock a good buy? Explain?

Question . Andiola Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. If the company purchases the equipment for $1,000,000 it will depreciate it over 5 years, using straight-line depreciation. If the company enters into a 5-year lease, the lease payment is $200,000 per year, payable at the beginning of each year. If the company purchases the equipment it will borrow from its bank at an interest rate of 11 percent.
a. Calculate the cost of purchasing the equipment.
b. Calculate the cost of leasing the equipment.
c. Calculate the net advantage to leasing. Should the company purchase or lease the equipment?

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Solution Preview

See the attached file. Thanks

Problem 1
Question .  The last free cash flow  for a company was $51 million and it is expected it to grow at a constant rate of 4 percent indefinitely.   The company's weighted average cost of capital is 12 percent.  The company has 25 million shares of outstanding stock, and the current price per share is $28.50. 
a. Calculate the company's free cash flow for next year. 
FCF0 $51.00 million
g=Growth rate 4%
FCF1=FCF0*(1+g) $53.04 million

b. Calculate the value of the company's operations. 
r=WACC 12%
V=Value of company operations=FCF1/(r-g)
V= $663.00 million

c. Calculate the value of one share of the company's stock. 
N=No of shares outstanding 25 million
P=Value of one share = V/N
P= $26.52

d. Is the company's stock a good buy?  Explain? 
No. The market price of the shares is higher than the intrinsic value of the stock. So stock is a Sell ...

Solution Summary

This post solves two problems. In first problem it shows how to calculate the value of stocks of the company using free cash flow method. In the second problem it shows how to calculate the net advantage to leasing.

$2.19
See Also This Related BrainMass Solution

Calculate the company's current debt ratio.

1- Pierre Imports recently issued two types of bonds. The first issue consisted of 10-year straight debt with a 10 percent annual coupon. The second issue consisted of 10-year bonds with a 9 percent annual coupon and attached warrants. Both issues sold at their $1,000 par values. The company's stock is currently selling for $24.50 per share.
a. Calculate the implied value of the warrants attached to each bond.
b. Discuss the advantages to the investor of purchasing bonds with warrants instead of straight bonds?
c. Discuss 2-3 advantages to the company of issuing a bond with warrants instead of straight bonds?
d. What will happen to the value of the bond with warrants if the company's stock price increases? Why?
e. What will likely happen to the value of the straight bond if the company's stock price increases? Why?

2.- Epoty Corporation is evaluating whether to lease or purchase needed equipment at a cost of $10,000. If the equipment is leased, the lease would not have to be capitalized. The company's balance sheet prior to the acquisition of the equipment is as follows.
a. Calculate the company's current debt ratio?
Equipment cost $10,000
Current Balance Sheet
Current assets $50,000 Debt $35,000
Net Fixed assets 40,000 Equity 55,000
Total assets $90,000 Total claims $90,000

b. Calculate the company's debt ratio if it purchases the equipment.
c. Calculate the company's debt ratio if it leases the equipment?
d. Will the company's ROA and ROE ratios be affected by its decision to lease or purchase? Why or why not?
e. What factors should the company consider in coming to its decision other than net advantage to leasing? Why?

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