Problem 1 The analyst is analyzing the financial statements of another Yettobe corporation (the statements are in million dollars). Its stock is currently traded at $50 and it has 20 million shares outstanding. The firms market value of debt is 120 millions. The shareholders require a return of 15% and before-tax cost of debt is 10%. Assume that the expected long-term growth rates in FCFF, FCFE, dividends, and residual income are 4%. Using the constant growth model to compute the following: a. What is firm value? b. What is the intrinsic equity value per share using FCFF? c. What is the intrinsic equity value per share using FCFE? d. What is the intrinsic equity value per share using DDM? e. What is the intrinsic equity value per share using residual income model? f. Based on our valuations, should the analyst give a buy/hold/sell recommendation for Yettobe stock?

Balance sheet 2018 2019 Income statement 2019 Current assets Revenue 2,500 Cash 17 18 (-) Cost of goods sold 2,000 Accounts receivable 23 20 Gross profit 500 Inventory 4 3 (-) SG&A 250 Total current assets 44 41 (-) Depreciation 50 Fixed assets EBIT 200 Gross property, plant, and equipment 920 1,000 (-) Interest expense 20 Accumulated depreciation (50) (100) EBT 180 Total fixed assets 870 900 (-) Taxes (at 20%) 36 Total assets 914 941 Net Income 144 Current liabilities Accounts payable 14 12 Short-term debt 50 60 Total current liabilities 64 72 Long-term debt 222 227 Total liabilities 286 299 Shareholders equity Commonstock 548 548 Retained earnings 80 94 Total equity 628 642 Total liabilities and owners equity 914 941