7.14 In 2011, No Growth Inc. had operating income before interest and taxes of $220 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $10 million that year. Capital spending totaled $20 million during 2011. At the end of 2010 and 2011, working capital totaled $70 million and $80 million, respectively. The firm’s combined marginal state, local, and federal tax rate was 40%, and its outstanding debt had a market value of $1.2 billion. The 10-year Treasury bond rate is 5%, and the borrowing rate for companies exhibiting levels of creditworthiness similar to No Growth is 7%. The historical risk premium for stocks over the risk-free rate of return is 5.5%. No Growth’s beta was estimated to be 1.0. The firm had 2.5 million common shares outstanding at the end of 2011. No Growth’s target debt–to–total capital ratio is 30%.

a. Estimate free cash flow to the firm in 2011. Answer: $112 million

b. Estimate the firm’s weighted average cost of capital. Answer: 8.61%

c. Estimate the enterprise value of the firm at the end of 2011, assuming that it will generate the value of free cash flow estimated in

(a) indefinitely. Answer: $1,300.8 million

d. Estimate the value of the equity of the firm at the end of 2011. Answer: $100.8 million

e. Estimate the value per share at the end of 2011. Answer: $40.33