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: Year 0 1 2 3 4 FCFF (in $mil) 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: Revenue $100 mil Cost of goods sold $30 mil Cash $10 mil $5 mil $2 mil Interest expenses Depreciation Capital Expenditure Change in net working capital $10 mil $5 mil Total debt $40 mil Total equity $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 EBIT/Asset (%) 40 30 20 10 5 Interest coverage ratio 8 5 4 2 0.5 Debt/ EBITDA (%) 40 100 120 150 300 Book value of debt/Market 20 50 100 200 500 Value of Equity (%) Credit risk premium? (%) 0 2 4 10 1 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) 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: Year 0 1 2 3 4 FCFF (in $mil) 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: Revenue $100 mil Cost of goods sold $30 mil Cash $10 mil $5 mil $2 mil Interest expenses Depreciation Capital Expenditure Change in net working capital $10 mil $5 mil Total debt $40 mil Total equity $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 EBIT/Asset (%) 40 30 20 10 5 Interest coverage ratio 8 5 4 2 0.5 Debt/ EBITDA (%) 40 100 120 150 300 Book value of debt/Market 20 50 100 200 500 Value of Equity (%) Credit risk premium? (%) 0 2 4 10 1 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)