Explore BrainMass
Share

Explore BrainMass

    Weighted average cost of capital / enterprise value

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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.

    © BrainMass Inc. brainmass.com October 10, 2019, 2:00 am ad1c9bdddf
    https://brainmass.com/economics/risk-analysis/weighted-average-cost-of-capital-enterprise-value-358196

    Attachments

    Solution Summary

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

    $2.19