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final exam practice problem solutions

# final exam practice problem solutions - 8,071.43 Step 4...

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1. ABC Company has \$250,000 in fixed costs. The company’s variable cost is \$2.50 per unit and the product can be sold at \$5.00. What is the company’s breakeven in units. BE = Fixed Costs Selling Price-Variable Cost BE= 250,000 5.00-2.50 BE = 100,000 units 2. Assume the following for XYZ Company: EBIT (1-T): \$500 million Depreciation: \$200 million Capital Expenditures: \$100 million WACC : 12% FCF is expected to grow at 5% per year Company has \$500 million in long-term debt 100 million shares outstanding What is the company’s estimated intrinsic value per share of common stock? Step 1 calculate the Free Cash Flow (FCF) EBIT(1-T) + Depreciation – Capital Expenditures 500+200-100 = \$600 million Step 2 calculate Present Value of FCF FCF WACC-g 600 .12-.05

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8,571.43 Step 3 Subtract market value of debt and preferred stock 8,571.43- 500
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Unformatted text preview: 8,071.43 Step 4 Divide by # shares outstanding 8,071.43 100 \$80.71 -This is the estimated intrinsic value 3. ABC Company 40% debt 10% preferred stock 50% common stock Average coupon on bonds is 7% YTM is 8% Company’s marginal tax rate is 35% Preferred stock’s current dividend is \$3.00 Current price is \$40 Company’s stock’s beta is 1.2 Risk free rate is 4.0% Market risk premium is 8.0% What is cost of debt, cost of preferred stock , cost of equity and WACC Cost of debt= YTM (1-t) .08 ( 1-.35)= .052 or 5.2% Cost of preferred = current dividend Current price \$3.00 \$40.00 .075 or 7.5% Cost of Equity Use CAPM to determine r R = r rf +B(r m-r rf ) R = .04 +1.2(.08) .136 or 13.6% WACC = (.40)(.052)+(.10)(.075)+(.50)(.136) .0208+.0075+.068 .0963 or 9.63%...
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