Delta Corporation is expected to grow at a higher rate of years; thereafter the growth rate will fall and stabilise at a lower level. The following information has been assembled:

Base Year (Year 0) Information

• Revenues $3 000 million
• EBIT $500 million
• Capital expenditure $350 million
• Depreciation $250 million
• Working capital as a percentage of revenues 25%
• Corporate tax rate (for all time) 30%
• Paid up equity capital ($10 par) $400 million
• Market value of debt $ 1 200 million

Inputs for the high growth phase

• Length of high growth phase 4 years
• Growth rate in revenues, depreciation , EBIT 20%

and capital expenditure

• Working capital as a percentage of revenues 25%
• Cost of debt (pre-tax) 13%
• Debt-equity ratio 1 : 1
• Risk-free rate 11%
• Market risk premium 7%
• Equity beta 1,129

Inputs for the Stable Growth Period

• Expected growth rate in revenues and EBIT 10%

Capital expenditures are offset by depreciation

• Working capital as a percentage of revenues 25%
• Cost of debt (pre-tax) 12,14%
• Risk-free rate 10%
• Market risk premium 6%
• Equity beta 1,0
• Debt-equity ratio 2 : 3

REQUIRED:

1. Calculate the WACC for the high growth phase and the stable growth phase.
2. Calculate the value of the firm.