Question
a) Company U will have a FCF of $50,000 in next year. The FCF is expected to decrease by 30 percent year after next year.
a) Company U will have a FCF of $50,000 in next year. The FCF is expected to decrease by 30 percent year after next year. The FCF will then increase by 20% in third and fourth year, and will keep a constant growth rate of 3% forever. The market value of debt is $220,000, and market value of preferred shares is $80,000. If the required return on the stock is 11 percent, WACC is 9 percent, and the number of share is 18,000, what will a share of stock sell for today?
b) Assume that interest rate is 13 %. Consider the following independent projects:
| Project A | Project B |
Year 0 | -$14,000 | -$12,500 |
Year 1 | +$2,000 | 0 |
Year 2 | +$15,000 | +$10,000 |
Year 3 | +$3,000 | +$10,000 |
Year 4 | +$3,000 | 0 |
Year 5 | +$7,000 | 0 |
Year 6 | +$8,000 | 0 |
Year 7 | -$15,000 | +$10,000 |
i) What is the discounted payback for Project A and Project B? Based on discounted payback rule (benchmark of 3 years), what is your decision?
ii) What is the IRR for Project A and Project B? Based on IRR, what is your decision?
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