# 03 millions now present value of cash flows from year

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Present Value of Cash Flows at end of Year 5 = \$ 452.03 millions Now, Present Value of Cash Flows from Year 6 to infinity = You are to calculate the value today of Minor Enterprises using the following 2018 data. Yo forecast future free cash flows for the next five years and the terminal cash flow using the g listed: Minor’s capital structure is 50% debt which costs 6%, 40% common stock equity which cos 10% preferred stock. The preferred stock dividend is \$3.00 and the preferred stock price is K 1 = Post Tax Cost of Debt R e = 12.5% (given in question) K p = \$ 3 / \$ 30 WACC = (K d X W d ) + (K e X W e ) + (K p X W p ) Present Value Factor @ 8.16%

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\$ 9,023.01 m Calculation of Total Value of Firm Total Value = Present Value of 5 years + Terminal Value 11382.98 = \$ 9023.3 = \$ 11382.98 million
ou will need to growth rates sts 12.5% and s \$30.

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Section 6 : Capital Structure a. Explain why component costs of debt and equity change as the debt ratio is increased b. Discuss one benefit and one risk of increasing financial leverage. Benefits of increasing leverage: Risk of increasing leverage: Disproportionate losses - Increasing financial leverage may present a possib c. What is optimal capital structure and at what point does this occur? d. All Star Production Corporation (APC) is considering a recapitalisation plan that would convert The recapitalisation proposal is to issue \$100 million of long-term debt at an interest rate of 6.5 (i) After the recapitalisation, calculate the number of shares outstanding (2 marks), the per share price (1 m After recapitalisation 600m = D +E = 100 +500 (ii) Debt equity ratio represents proportion between shareholder's equity and debts used to finance assets capability of company to repay its lenders out of shareholder's equity in the event business declines. In company is increasingly borrowing funds for expansion of business. With the increase of debt equity ra and loan repayment and possibility of bankruptcy increases if business hits hard times. Hence, the com proportionately so that lenders and shareholders can safeguard themselves with higher returns in term combination this represents cost of capital. Higher debt ratio represents higher cost of capital as lender a. Enhanced earnings - Increasing financial leverage may permit a company Optimal capital structure is the mixture of debt and equity which maximises the value of the firm or ma maximise shareholders value, thus even the capital structure should be one maximises it. i. Before Recapitalization 12m * 50 = 600m D/E = 100/500 = 0.2
Before recapitalising, calculate the earnings per share (EPS) and ROE for APS shareh ROE = \$5 / \$50 = 10% EPS = \$60m / 12m = \$5 per share (iii) After recapitalising what is the new EPS and ROE EPS = \$60m - \$6.5m / 10m shares = \$53.5m / 10m = \$5.35 per share EBIT ROE = \$5.35 / \$50 x 100 = 10.7% Interest @6.5% Earnings e. (i) What is market value (1 mark) and required return of this firm’s stock (1 mark) before (ii) What is the market value and required return of this firm’s remaining stock after the Issues 1m debt VF = 2M = 12.5 + 1/1(12.5 – 5) 0.2 f.

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