The management of Idaho Potato Industries $($IPI$)$ is planning

next year$$s capital budget. The company$$s earnings and

dividends are growing at a constant rate of $4\mathrm{.}2\%.$ The last

dividend $($DIV$0)$ was $$0\mathrm{.}90$; and the current equilibrium stock

price is $$6\mathrm{.}85.$ CPI can raise new debt at a $12\%$ before$-$tax

cost$.$ CPI is at its optimal capital structure which is $33\%$

debt and $67\%$ equity, and the firm$$s marginal tax rate is

$22\%.$ FCI has the following independent, indivisible, and

equally risky investment opportunities. What is CPI$$s WACC

and what is IPI$$s optimal capital budget? Explain

Project Cost Rate of Return

A $-$$$14,00018\%$

B $-$$$12,00016\%$

C $-$$$16,00013\%$

D $-$$$28,00012\%$

What is the optimal capital budget if project A has high risk and D is

low risk, while projects B and C are average risk?. High risk project

will need to raise the WACC by $1\mathrm{.}2$ percentage point while low risk

project will decrease WACC by $1\mathrm{.}2$ percentage point

Project Cost Rate of

Return

WACC Decision

A High Risk $-$$$14,00018\%$

B $-$$$12,00016\%$

C $-$$$16,00013\%$

D Low Risk $-$$$28,00012\%$

Problem $2$

Florox company is a fast growing company of recreation and

entertainment service. Analyst project the following $4$ years of

free cash flows $($FCF$),$ after which FCF is expected to grow at a

constant rate of $3\mathrm{.}5\%$ each year. Florox$$s WACC is $10\mathrm{.}5\%$

Time T $=1$ T $=2$ T$=3$

FCF $($$ million$)-$$$9$ $$10$ $$13$

a$)$ What is Florox$$s terminal or horizon value $($in millions$)?$

b$)$ What is the current value of operations $($in millions$)$ for

Florox?

c$)$ Suppose Florox has $$5\mathrm{.}1$ million in marketable securities$,$

$$23$ million in debt, and $5\mathrm{.}5$ million shares of stock. What

is stock price per share?

$3.$ A company has capital of $$340$ million. It has an EROIC of $11\mathrm{.}5\%,$ forecasted constant

growth of $6\%,$ and a WACC of $12\%.$ What is its value of operation? What is its intrinsic

MVA?

$4.$ You are given the following forecasted information for year $2022$: sales $=$ $$500,000,000,$

operating profit $($OP$)=7\mathrm{.}2\%,$ capital requirements $($CR$)=34\%,$ growth $($g$)=5\%,$ and the

weighted average cost of capital $($WACC$)=10\mathrm{.}2\%.$ If these values remain constant,

what is the horizon value $($i$.$e$.,$ the $2022$ value of operations