Casa Systems, Inc specializes in communications equipment Its revenues will be $300m, its costs (not including depreciation) will be $120m, depreciation will be $50m, and capital expenditures will be $60m There are no changes in net working capital All these figures (including capital expenditures) accrue at the end of this year Moreover, these figures are expected to remain constant each year in perpetuity The firm is financed entirely with equity and has 50m shares outstanding You have no further information about Casa Systems However, you have data for Cisco Systems and Netgear, two firms in the same industry Both Cisco Systems and Netgear maintain constant debt to value ratios Market Value of Equity ($bn) Market Value of Debt ($bn) Equity Beta DebtBeta Cisco Systems 200 50 1 8 0 Netgear 1 0 5 2 2 0 1 The risk free rate is 2 and the market risk premium is 5 The corporate tax rate is 20 (5 points) What is the annual Free Cash Flow to the Firm (FCFF) for Casa Systems (5 points) What is the share price for Casa Systems (20 points) Suppose Casa Systems decides to issue debt and to pay out the proceeds from the debt issue by repurchasing shares The amount of debt issued will be such that the firm will switch to a 60 debt to value ratio Moreover, Casa Systems plans to maintain this debt to value ratio constant in the foreseeable future (5 points) Calculate the weighted average cost of capital (WACC) for Casa Systems after the change in capital structure (5 points) What is the value of the firm after the change in capital structure Use either the WACC method or the APV method (You dont need to use both methods ) (3 points) What is the market value of Casa Systems debt and equity after the change in capital structure (i e after the debt issue and the share repurchase) (7 points) What is the share price after the change in capital structure (i e after the debt issue and the share repurchase) How many shares are repurchased and at what price How many shares are outstanding after the change in capital structure

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 10, 2024

Casa Systems, Inc specializes in communications equipment. Its revenues will be $300m, its costs (not including depreciation) will be $120m, depreciation will be $50m, and

Casa Systems, Inc specializes in communications equipment. Its revenues will be $300m, its costs (not including depreciation) will be $120m, depreciation will be $50m, and capital expenditures will be $60m. There are no changes in net working capital. All these figures (including capital expenditures) accrue at the end of this year. Moreover, these figures are expected to remain constant each year in perpetuity. The firm is financed entirely with equity and has 50m shares outstanding.

You have no further information about Casa Systems. However, you have data for Cisco Systems and Netgear, two firms in the same industry. Both Cisco Systems and Netgear maintain constant debt-to-value ratios.

	Market Value of Equity ($bn)	Market Value of Debt ($bn)	Equity Beta	DebtBeta
Cisco Systems	200	50	1.8	0
Netgear	1	0.5	2.2	0.1

The risk-free rate is 2% and the market risk premium is 5%. The corporate tax rate is 20%.

(5 points) What is the annual Free Cash Flow to the Firm (FCFF) for Casa Systems?
(5 points) What is the share price for Casa Systems?
(20 points) Suppose Casa Systems decides to issue debt and to pay out the proceeds from

the debt issue by repurchasing shares. The amount of debt issued will be such that the firm will switch to a 60% debt-to-value ratio. Moreover, Casa Systems plans to maintain this debt-to-value ratio constant in the foreseeable future.
1. (5 points) Calculate the weighted-average cost of capital (WACC) for Casa Systems after the change in capital structure.
2. (5 points) What is the value of the firm after the change in capital structure? Use either the WACC method or the APV method. (You dont need to use both methods.)
3. (3 points) What is the market value of Casa Systems debt and equity after the
  
  change in capital structure (i.e. after the debt issue and the share repurchase)?
4. (7 points) What is the share price after the change in capital structure (i.e. after the debt issue and the share repurchase)? How many shares are repurchased and at what
  
  price? How many shares are outstanding after the change in capital structure?