Question 3 (7 marks)

Charles Jones is evaluating Reliant Home Furnishings by using a three-stage growth model. He has accumulated the following information:

Current FCFF $745 million

Outstanding shares 309.39 million

Equity beta 0.90,

risk-free rate 5.04 percent;

equity risk premium 5.5 percent

Cost of debt 7.1 percent

Marginal tax rate 34 percent

Capital structure 20 percent debt, 80 percent equity

Long-term debt $1.518 billion

Growth rate of FCFF

- 8.8 percent annually in stage 1, years 14

- 7.4 percent in year 5,

- 6.0 percent in year 6,

- 4.6 percent in year 7

- 3.2 percent in year 8 and thereafter

From the information that Jones has accumulated, estimate the following:

b) WACC. (1 marks)

c) Total value of the firm. (2 marks)

d) Total value of equity. (2 marks)

e) Value per share. (2 marks)