Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Assume that Target will be a mature firm at the end of 2016, with expected return on capital equal to its cost of capital. The
Assume that Target will be a mature firm at the end of 2016, with expected return on capital equal to its cost of capital. The forecasted net income is $ 770 million in
- 2016 after interest expense of $ 320 million. (The corporate tax rate was 36 %.) The depreciation is assumed to be 960 million in that year and capital expenditure is $ 1.2 billion. The firm will also have $ 4 billion in debt outstanding, rated AA (carrying a yield to maturity of 8%) and trading at par. The beta of the stock will be 1.05 and there will be 200 million shares outstanding. The target debt-to-equity ratio is forecasted to be 1/3. The working capital requirements can be negligible. (The Treasury bond rate was 7%, and the risk premium was 5.5 %.)
A. Estimate the free cash flow to the firm (FCFF) in 2016.
B. Estimate the cost of capital.
C. Estimate the expected growth rate.
D. Estimate the value of the equity at the end of 2016 using FCFF approach.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started