You are considering an equity investment in HandSanitiser, a listed firm, to add to your portfolio. The free cash flows to firm (FCFF) are shown below: 0 2 3 4 Year FCFF (in Smil) 8 10 11 12 15 After year 4, the FCFF is expected to grow at 5% indefinitely. Further information from recent financial statements are shown below: $100 mil $30 mil $10 mil $5 mil Revenue Cost of goods sold Cash Interest expenses Depreciation Capital Expenditure Change in net working capital Total debt Total equity $2 mil $10 mil $5 mil $40 mil $60 mil Total asset $100 mil Tax rate 30% The firm issued $40 mil 30-year fixed-rate annual coupon debt at par three years ago. You rely on Moody's, a credit rating agency, to update the firm's debt financing conditions. Moody's recently published the financial metrics associated with their credit ratings: Baa Ba B 40 30 20 10 5 8 5 4 2 0.5 40 100 120 150 300 EBIT/Asset (%) Interest coverage ratio Debt/ EBITDA (%) Book value of debt/Market Value of Equity (%) Credit risk premium(%) 20 50 100 200 500 0 2 4 10 All result from servicing the existing debt. 2 On top of the risk-free rate. The current share price is $8. The firm has 10 million shares outstanding. The market risk premium is 6%. The firm's equity beta is 1.5. You use the current 10-year Treasury yield of 5% to proxy for the risk-free rate. A. What is the firm's weighed average cost of capital (WACC)? (6 marks) B. What is the firm value implied by the discounted Free Cash Flows model? Will you add the share to your portfolio? (4 marks)