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Weighted average cost of capital / enterprise value

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

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See Also This Related BrainMass Solution

Barbow Enterprise Accounting

Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:
• The cost of Common Equity: 15%
• The before tax cost of debt: 12%
• No Preferred stock
They have also calculated the marginal tax rate to be 40% and the stock sells at its book value.
Barbow Enterprises Inc.
Balance Sheet
Assets Liabilities and Owners' Equity

Cash $240 Long Term Debt $2,304
Accounts Receivable 480 Equity 3,456
Inventories 720
Net P&E 4,320
Total Assets $5,760 Total Liabilities and owners' Equity $5,760
Calculate Barbow's after-tax weighted average cost of capital, using the data in the balance sheet above.

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