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    Free cash flow, cost of equity and WACC

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    Please help me solve these problems.

    The following are the information on the income statements of an Oil firm, for 2007 and 2008 (all dollar figures are in millions):
    Sales: $12,200.00, cost of goods sold: 72% of sales, depreciation: $850.00, additional CAPEX: $900.00, additional investment in net working capital: $150.00
    Sales: $14,500.00, cost of goods sold: 78% of sales, depreciation: $970.00, additional CAPEX: $1,200.00, additional investment in net working capital: $200.00
    Applicable tax rate for the company is 38%.
    a. Calculate free cash flows (FCF) for 2007 and 2008
    b. Estimate FCF for 2009-2013 using the following assumptions: Company's sales will grow at 15% per year over the next five years, cost of goods sold is expected to increase by 2% each year from its 2008 level, CAPEX is expected to be additional 10% of additional sales per year, additional net working capital per year will be equal to 5% of additional sales, depreciation expenses will equal to the prior year total plus 10% additional CAPEX of each year. Since the company is a going concern we need not be concerned about the liquidation value of the firm's assets at the end of 2013.

    A Manufacturing Company's current capital structure is comprised of 40% debt and 60% equity (based on market values). Its equity beta (based on its current level o debt financing) is 1.4 and its debt beta is 0.32. Also, the risk free rate of interest is currently 3.5% on long-term government bonds. Its cost of debt is 8%. The company's investment banker advised the firm that, according to its estimates, the market risk premium is 6.5%.
    1- What is your estimate of the cost of equity capital for this company (based on the CAPM)?
    2- If the firm's marginal tax rate is 35%, what is the firm's overall weighted average cost of capital?
    3- In addition, the firm is considering a major expansion of its current business operations. The firm's investment banker estimates that it will be able to borrow to 40% of the needed funds and maintain its current credit rating and borrowing cost. Estimate the WACC for the project.

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    Solution Summary

    The solution explains some problems relating to calculation of free cash flow, cost of equity and WACC