Mike, an equity analyst, is evaluating Platinum Manufacturing (PM)

Question

Mike, an equity analyst, is evaluating Platinum Manufacturing (PM)

by using the FCFF and FCFE valuation approaches. Mike gathered the following information:

Net Income                                                 $275 million
Depreciation                                              $80 million
Loss on asset                                             $20 million
Income from restructuring expenses      $5 million
Capital expenditure                                   $150 million
Increase in working capital                       $50 million

Additional information:
• PM will finance the increase in fixed assets and the increase in working capital with 40% debt.
• The current market value of PM's outstanding debt is 1,500 million and the interest expense is 120 million.
• The expected growth rate of FCFF and FCFE is 2.5% and 3%, respectively, indefinitely.
• PM has 20 million shares outstanding and has a tax rate of 30%.
• PM is financed with 40% debt with a before-tax cost of debt of 6% and 60% equity with a before-tax rate of 10%.

Question 1) Calculate the WACC of PM.

Question 2) The current FCFF of PM is closest to:

Question 3) The current FCFE of PM is closest to:

Question 4) The value of equity of PM using the FCFE valuation approach is closest to:

Answer 1

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