Question
Suppose Frito Enterprises has the following capital structure: 40% debt, 10% preferred stock, 50% equity. The companys yield to maturity on its bond issue outstanding
Suppose Frito Enterprises has the following capital structure: 40% debt, 10% preferred stock, 50% equity. The companys yield to maturity on its bond issue outstanding is 6%. The corporate tax rate is 35%. The companys stock has a beta of 1.2. The risk free rate is 3% and the market risk premium is 6%. The preferred stock dividend yield is 10%. What is the companys weighted average cost of capital?
If Frito Enterprises expects to pay a dividend next year of $3.00 and expects to grow the dividend at a constant rate of 4%, what would price of the shares today based on the constant growth DDM?
Competitor Dorito Enterprises has the following information regarding its capital structure:
The company has a bond issue outstanding with a face value of $5 million. The bond has a coupon rate of 5% paid annually and matures in 30 years. The bond currently has a yield to maturity of 4%. The corporate tax rate is 40%.
The company has 200,000 shares outstanding of common stock currently priced at $20/per share. The book value of the equity is $2 million. The company expects to pay a dividend next year of $1 and grow it every year thereafter at a rate of 3%.
The company has 10,000 shares of preferred stock with a current price of $60/per share. The dividend on the preferred shares is $6/per share.
From the information above, calculate the WACC for Dorito Enterprises.
Super Bonus: Dorito has $5.865 million in debt and $1 million of cash. If Dorito expects to generate $200,000 in free cash flow next year, $210,000 in year 2 and $225,000 in year 3 and grow it every year thereafter at a constant rate of 3%, what is should be the price of its shares and would you buy the stock today? (Hint: Given this is free cash flow of the entire company and not just dividends paid to shareholders, you would use the WACC in your calculation and V2 = FCF 3 / (WACC g)). You would then need to view Value in time 2 as Enterprise Value and discount it along with the other FCFs to calculate V0; then remember that Market Value of Equity = EV - Debt - Preferred Stock + Cash. So solve for the Market Value of the Equity and then divide by shares outstanding to get the share price.
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