Question
1- ABC Corp. plans to finance its expansion by borrowing $40 million and halting dividends. No other debt or preferred stock is in the firm.
1- ABC Corp. plans to finance its expansion by borrowing $40 million and halting dividends. No other debt or preferred stock is in the firm. The projected free cash flows are: Year 1 FCF = $8 million and Year 2 FCF = $10 million. The FCFs are expected to grow at constant rate of 6% after year 2. The WACC is 14%, and the company has 5 million shares of stock. What should be the current stock price?
2- You found three independent firms solely engaging in the same business of your division. Firm A has a beta of 1.7 and D/E of 1.2, firm B has a beta of 1.5 and D/E of 1, and firm C has a beta of 1.2 and D/E of 0.7.
Your divisions D/E is 1.5. The tax rate is 40%. The before tax cost of debt is 8%. The risk-free rate is 4% and the market return is 11%.
What is your division's WACC?
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