Question
3. Hot Pockets Corporation is considering going public.Managers want to estimate common stock value. The standard deviation of returns for this firm is 20%. The
3.Hot Pockets Corporation is considering going public.Managers want to estimate common stock value. The standard deviation of returns for this firm is 20%. The firm's beta is 0.8. 3-month T-Bills currently trade at a discount to par of 1% on an annualized basis. The expected return on the stock market is 10%. There are 10,000 shares of common stock outstanding. Assume the firm's capital structure is 50% debt, 50% common equity, the cost of debt is 6%, and the marginal tax rate for the firm is 21%.
a) What is the total risk of this firm, and what is its systematic risk?
b) What is the expected return of this stock? What is the name of the model you use to estimate it?
c) What is the Weighted Average Cost of Capital for the firm?
d) If the firm's estimated free cash flows over the next 3 years are:
YearEstimated Free Cash Flow
2018$100,000
2019$200,000
2020$300,000
and after 2020 to infinity, expected free cash flows will grow at a rate of 4% per year: (i) what is the value of its equity outstanding; and (ii) what would be the price per share?
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