Question
10. (25 marks) You have the following information about a company. Sales in 2019 were 2000 million. Sales are expected to grow at a rate
10. (25 marks) You have the following information about a company.
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Sales in 2019 were 2000 million. Sales are expected to grow at a rate of 15% in 2020, and afterwards the growth rate will drop to 3%.
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EBIT margin is expected to stay constant at 15%.
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The corporate tax rate is 40%.
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Net working capital each year is expected to stay constant at 10% of next year's sales.
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To generate sales growth, each year t, capital expenditure net of depreciation (i.e., Capex- Depreciation) is expected to be 1/3 of the sales increase from year t to year t+1.
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The debt-to-equity ratio (D/E) of the company is expected to stay constant at 1/2 and its equity cost of capital is 15%.
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The firm has perpetual bonds outstanding with a coupon rate of 9% paid annually. The bonds are currently selling at par and have a AAA credit rating.
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(8 marks) Estimate the after-tax weighted average cost of capital (WACC) of the company.
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(10 marks) Compute the value of the company at the beginning of 2020 using the WACC
method. You may assume that all cash flows occur at the end of each year.
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c. (7 marks) Assuming that at the beginning of 2020 the companys balance sheet had 100 million in excess cash and 200 million in long-term debt, find the companys stock price if the company has 100 million shares outstanding.
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