You have been asked to value a stable company (i.e., no growth) whose revenues are $150 million and operating margins are 25 percent. Since the company is not growing, working capital is constant and capital expenditures are spent only to replace depreciation. The company has $100 million in debt outstanding and has a cost of debt equal to 5 percent (the companys bonds trade at par, so interest payments can be computed using the cost of debt). The company has 20 million shares outstanding and its stock is trading at $7.50. The company has a cost of equity equal to 12 percent. The company faces a tax rate of 40 percent.

a. Using a no-growth perpetuity (FCF divided by WACC), estimate the companys enterprise value, the companys equity value, and its stock price. Is the company undervalued?

b. If interest taxes shields are discounted at the unlevered cost of equity, what is the unlevered cost of equity?

c. Compute enterprise value using adjusted present value. How does your result differ from part a?