# Weighted average cost of capital / enterprise value

Questions attached

Show all your calculations in this problem. Consider the following company. It has the following financial projections for the next two years (years 1 and 2) in millions of dollars. Assume depreciation is included in COGS.

Year 0 Year 1 Year 2

Sales Revenue --- $ 1,000 $ 1,100

COGS --- 600 650

SG&A --- 130 120

Current Assets

Cash $ 30 $ 50 $ 50

Receivables 35 55 100

Inventories 125 200 220

Total Current Assets $ 190 $ 305 $ 370

Net Fixed Assets 640 760 700

Total Assets $ 830 $ 1,065 $ 1,070

Current Liabilities

Accrued Expenses and other

Non-Interest-Bearing Current Liabilities $ 15 $ 20 $ 60

Accounts Payable 40 45 50

Total Current Liabilities $ 55 $ 65 $ 110

Long-Term Debt 700 700 700

Equity 75 300 260

Total Liabilities and Net Worth $ 830 $ 1,065 $ 1,070

Other Data

? The current time is Year 0

? Firm's equity β at present = 1.5

? Current debt/equity ratio market value terms = 0.25 (assume this is also the optimal capital structure)

? 50 million shares outstanding; current stock price = $18

? Tax rate = 40%

? The risk-free rate is 4% and the market equity risk premium is 7%

? Pre-tax cost of debt for firm = 8%

(1) What is the weighted average cost of capital applicable to this firm?

(2) Calculate the enterprise value of this firm at present (Year 0) using discounted cash flow analysis assuming that the free cash flow in year 2 will grow 2% per year forever.

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#### Solution Summary

The solution explains how to calculate the weighted average cost of capital and the enterprise value.