ABC Incorporated had operating income before interest and taxes in 2002 of $220 million. The firm was expected to generate this level of operating income indefinitely. The firm had depreciation expense of $10 million that same year. Capital spending totaled $20 million during 2002. At the end of 2001 and 2002, working capital totaled $70 and $80 million, respectively. The firms combined marginal state, local, and federal tax rate was 40% and its debt outstanding had a market value of $1.2 billion. The 10-year Treasury bond rate is 5% and the borrowing rate for companies exhibiting levels of creditworthiness similar to ABC is 7%. The historical risk premium for stocks over the risk-free rate of return is 5.5%. ABCs beta was estimated to be 1.0. The firm had 2,500,000 common shares outstanding at the end of 2002. ABCs target debt-to-total capital ratio is 30%.

a) Estimate free cash flow to the firm in 2002. (6 points)

b) Estimate the firms cost of equity. (4 points)

c) Estimate the value of the firm (i.e., includes the value of equity and debt) at the end of 2002, assuming that it will

generate the value of free cash flow estimated in (a) indefinitely. (8 points)

d) Estimate the value of the equity of the firm at the end of 2002. (5 points)

e) Estimate the value per share at the end of 2002. (2 points)