Course title: Corporate Finance/Corporate Finance and Accounting

QUESTION THREE - [20 marks] XYZ Ltd reported net income of $770 million after interest expenses of $320 million in a recent financial year. The corporate tax rate was 36\%. It reported depreciation of 960 million in that year, and capital spending was $1.2 billion. Page 3 of 7 The firm also had 4 billion in debt outstanding on the books, was rated AA (carrying a yield to maturity of 8% ) and was trading at par (up from $3.8 billion at the end of the previous year). The beta of the stock is 1.05 and there were 200 million shares outstanding (trading at 660 per share), with a book value of $5 billion. XYZ Ltd paid 40% of its earnings as dividends and working capital requirements are negligible. The Treasury bond rate is 7%. You can assume a market risk premium of 5.5%. REQUIRED: i) Estimate the Free Cash Flow to the Firm for the most recent financial year. ii) Estimate the value of the Firm. iii) Estimate the value of equity and the value per share now