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