Exercise 2. (7 points). The newly appointed CFO of ABC Corp., Mr. Smith, is preparing for an upcoming conference call with investors. The reason for the call is that, three days ago, the company's CEO, Mr. Brooks, mentioned in a live interview to CNBC that ABC would become more aggressive in creating shareholder value. The company had traditionally avoided leverage: it is 100% equity financed and currently has 5M of cash on its balance sheet. Seconds after the interview, ABC's stock price went up 10% to 58.3 Euros per share, and stayed at the level since then. The firm has 2 billion shares outstanding. A Reuters article published the same day stated that ABC might issue "long-dated AA-rated bonds" and use the proceeds "to repurchase stocks in a bid to implement a new "long-run leverage target policy. The same article also stated that even with new debt "the possibility of financial distress at ABC remains very remote". Mr. Smith is reviewing the most recent forecast available for the next fiscal year, as well as capital market data: Analyst consensus for FY2018, in Bn. Euros Sales** 110 EBITDA margin 15% Capex Depr. & Amortization NWC (%sales) Long-term growth rate*** Effective tax rate 10% 3% 7 5 ** In fiscal year 2017, sales of Divided Airlines were 100 Bn euros ***expected growth beyond 2019 30% Market data Cost of equity capital Cost of debt capital Equity Market-to-book (prior to the interview) 8% 3.50% 2.5 Please help Mr. Smith prepare for the conference call by answering his questions: a. Remind me, what was ABC's enterprise value and equity value at market prices before the interview?" b. "Can you please check that our stock price before the interview reflects the fundamental value of our business? You can assume that ABC lives in perpetuity." c. "I think we can use the market reaction to the interview to infer the market estimate of our new debt level." How?