You are a conservative investor who is considering investing in "Fly Away Films", a small film company. You like the intrinsic valuation approach and want to calculate Fly Away Films' weighted average cost of capital and then perform a discounted cash flow analysis. You note that the equity market risk premium is 5.8%. The risk free rate is 2.5% and the tax rate is 35%. You feel that Fly Away Films is riskier than the CAPM would indicate due to its small size and believe it has a size risk premium of 1.2%. You have the following information about Fly Away Films: Bonds: Fly Away Films has two bonds as outlined below: o Bond One: six year maturity, $1,000 face value semi-annual coupon bond with a coupon of 1.73% and a yield to maturity of 4.23%. Fly Away Films has 25,637 of these bonds outstanding. o Bond Two: is a coupon bond that pays annually and has nine years to maturity. The coupon rate is 2.75%, its yield to maturity is 4.78% and its face value of $1,000. Fly Away Films has 7,864 of these bonds outstanding. Equity: Fly Away Films has 4,125,876 common shares outstanding and its stock price is $3.56. Fly Away Films' beta is 3.1 and its Shareholder's Equity from the balance sheet is $9.3mm. Unlevered Free Cash Flow as per the following table: Unlevered Free Cash Flow LFY+2 LFY+3 LFY+4 LFY +1 $5,500,000 LFY+5 $7,854,000 $6,250,000 $6,750,000 $7,298,000 a) Calculate Fly Away Films' weighted average cost of capital. Please show all your work and round to at least 2 decimal points. (15 Marks) You are a conservative investor who is considering investing in "Fly Away Films", a small film company. You like the intrinsic valuation approach and want to calculate Fly Away Films' weighted average cost of capital and then perform a discounted cash flow analysis. You note that the equity market risk premium is 5.8%. The risk free rate is 2.5% and the tax rate is 35%. You feel that Fly Away Films is riskier than the CAPM would indicate due to its small size and believe it has a size risk premium of 1.2%. You have the following information about Fly Away Films: Bonds: Fly Away Films has two bonds as outlined below: o Bond One: six year maturity, $1,000 face value semi-annual coupon bond with a coupon of 1.73% and a yield to maturity of 4.23%. Fly Away Films has 25,637 of these bonds outstanding. o Bond Two: is a coupon bond that pays annually and has nine years to maturity. The coupon rate is 2.75%, its yield to maturity is 4.78% and its face value of $1,000. Fly Away Films has 7,864 of these bonds outstanding. Equity: Fly Away Films has 4,125,876 common shares outstanding and its stock price is $3.56. Fly Away Films' beta is 3.1 and its Shareholder's Equity from the balance sheet is $9.3mm. Unlevered Free Cash Flow as per the following table: Unlevered Free Cash Flow LFY+2 LFY+3 LFY+4 LFY +1 $5,500,000 LFY+5 $7,854,000 $6,250,000 $6,750,000 $7,298,000 a) Calculate Fly Away Films' weighted average cost of capital. Please show all your work and round to at least 2 decimal points. (15 Marks)
