Question
The Perpetual Motion Machine (PMM) makes children's toys. The CEO of PMM, Mr. Costa Bundle, has so far maintained a conservative capital structure. PMM is
The Perpetual Motion Machine (PMM) makes children's toys. The CEO of PMM, Mr. Costa Bundle, has so far maintained a conservative capital structure. PMM is 100% equity financed with 100 million shares outstanding and a market price of $10. PMMs forecasted FCFs for next year is $100 million expected to grow at 2% and its equity beta is 1. The risk -free rate is 5% and the expected market risk premium is 7%.
(a) Find PMMs unlevered asset beta and return on unlevered assets. Is PMM currently overvalued or undervalued in the market?
(b) Construct PMM's market value, beta and return balance sheets.
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