ABC Inc. reported EBIT of $2000 million. It also reported depreciation of $500 million and capital spending of $1.3 billion, working capital requirements are $100 million. The firm has $5.5 billion in debt outstanding, currently trading at par, rated AA with a yield to maturity of 9%. The beta of the stock is 1.25, and there are 300 million shares outstanding trading at $50 per share, with a book value of $7 billion. The Treasury bond rate is 5%, the market risk premium is 6% and the corporate tax rate is 32%.

a. Estimate the current free cash flow to the firm.

b. What is the expected growth of operating income?

c. What is the cost of capital of ABC Inc.?

d. Estimate the value of ABC Inc.

e. Estimate the value of equity of ABC Inc.

f. Based on your estimation, what is the value of equity on a per share basis? Is ABC Inc. correctly priced by the market? State an example of trading strategy you can use to take advantage of any current market mispricing.