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Please see the attachment and help to solve these two problem: 9 . 4 . Canton Corporation is a privately owned firm that engages in
Please see the attachment and help to solve these two problem:
Canton Corporation is a privately owned firm that engages in the production and sale of industrial chemicals, primarily in North America. The firms primary product line consists of organic solvents and intermediates for pharmaceutical, agricultural, and chemical products. Cantons managers have recently been considering the possibility of taking the company public and have asked the firms investment banker to perform some preliminary analysis of the value of the firms equity.
To support its analysis, the investment banker has prepared pro forma financial statements for each of the next four years under the simplifying assumption that firm sales are flat i e have a zero rate of growth the corporate tax rate equals and capital expenditures are equal to the estimated depreciation expense. In addition to the financial information on Canton, the investment banker has assembled the following information concerning current rates of return in the capital market:
The current market rate of interest on tenyear Treasury bonds is and the market risk premium is estimated to be
Cantons debt currently carries a rate of and this is the rate the firm would have to pay for any future borrowing as well.
Using publicly traded firms as proxies, the estimated equity beta for Canton is
a What is Cantons cost of equity capital? What is the aftertax cost of debt for the firm?
b Calculate the equity free cash flows for Canton for each of the next four years. Assuming that equity free cash flows are a level perpetuity for year and beyond estimate the value of Cantons equity. Equity value is equal to the present value of the equity free cash flows discounted at the levered cost of equity. If the of interest on Cantons debt is equal to the coupon, what is the current market value of the firms debt? What is the enterprise value of Canton? Enterprise value can be estimated as the sum of the estimated values of the firms interestbearing debt plus equity.
c Using the market values of Cantons debt and equity calculated in Problem b calculate the firms aftertax weighted average cost of capital.
d What are the FCFs for Canton for years through
e Estimate the enterprise value of Canton using the traditional WACC model. Base your estimate on your previous answers, and assume that the FCFs after year are a level perpetuity equal to the year FCF How does your estimate compare to your earlier estimate using the sum of the values of the firms debt and equity?
f Based on your estimate of enterprise value, what is the value per share of equity for the firm if the firm has million shares outstanding? Remember that your calculations up to this point have been in thousands of dollars.
This problem uses the information from Problem about Canton Corporation to estimate the firms enterprise value using the APV model.
What is the firms unlevered cost of equity? Hint: The firms debt beta is
What are the unlevered FCFs for Canton for years through Hint: The unlevered FCFs are the same as the firm FCFs
What are the interest tax savings for Canton for years through
Assuming that the firms cash flows from operations ie its FCFs and its interest tax savings are level perpetuities for year and beyond that equal their year values, what is your estimate of the enterprise value of Canton?
Based on your estimate of enterprise value, what is the value per share of equity for the firm if the firm has million shares outstanding? Remember that your calculations up to this point have been in thousands of dollars.Canton Corporation Financials
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