Nordstrom is spinning off its casual clothing segment and you are trying to determine the value...
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Nordstrom is spinning off its casual clothing segment and you are trying to determine the value of the spun-off entity. You estimate that the division's free cash flow in the coming year to be $100 million, and you expect the free cash flows will grow by 3% per year in subsequent years. Because the spin-off isn't publicly traded yet, you do not have an accurate assessment of the division's equity beta. However, you do have beta data for Gap, Inc., a firm it closely resembles. Gap has an equity beta of 1.1, a debt beta of 0, and a debt-equity ratio of 0.20. Nordstrom has a beta of 2.2, a debt-equity ratio of 1.0 (the spun-off firm will maintain this leverage ratio), and has been told by its investment bankers that the debt cost of capital will be 6%. The corporate tax rate is 40%, the risk-free rate is 5%, and the historical market risk premium, (E[Rmkt]-I), is 6%. 3) Estimate the spun-off division's WACC. Is the spun-off division's WACC equal to 15%? If it is not, how may using a WACC of 15% affect their corporate investment decision making? 4) Estimate the spun-off unit's share value based on the 100 million shares that will be outstanding after the spin-off. Nordstrom is spinning off its casual clothing segment and you are trying to determine the value of the spun-off entity. You estimate that the division's free cash flow in the coming year to be $100 million, and you expect the free cash flows will grow by 3% per year in subsequent years. Because the spin-off isn't publicly traded yet, you do not have an accurate assessment of the division's equity beta. However, you do have beta data for Gap, Inc., a firm it closely resembles. Gap has an equity beta of 1.1, a debt beta of 0, and a debt-equity ratio of 0.20. Nordstrom has a beta of 2.2, a debt-equity ratio of 1.0 (the spun-off firm will maintain this leverage ratio), and has been told by its investment bankers that the debt cost of capital will be 6%. The corporate tax rate is 40%, the risk-free rate is 5%, and the historical market risk premium, (E[Rmkt]-I), is 6%. 3) Estimate the spun-off division's WACC. Is the spun-off division's WACC equal to 15%? If it is not, how may using a WACC of 15% affect their corporate investment decision making? 4) Estimate the spun-off unit's share value based on the 100 million shares that will be outstanding after the spin-off.
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To estimate the spunoff divisions weighted average cost of capital WACC we need to calculate the cos... View the full answer
Related Book For
Fundamentals of biochemistry Life at the Molecular Level
ISBN: 978-0470547847
4th edition
Authors: Donald Voet, Judith G. Voet, Charlotte W. Pratt
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