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. [2 marks]

b. What is the expected growth of operating income? [2 marks]

c. What is the cost of capital of ABC Inc.? [3 marks]

d. Estimate the value of ABC Inc. [2 marks]

e. Estimate the value of equity of ABC Inc. [2 marks]

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. [4 marks]