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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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