Mr Bean

In: Business and Management

Submitted By Pauluuuus
Words 266
Pages 2
$20/share x (1+6%)=20*1.06
=$21.20 expected stock price in 1 year. Dividend in 1 year (D1)= $1.00*1.06=$1.06 k=(D1/P0) + g
=(1.06/20) + .06
=.113
Required rate of return is 11.3%

.

Firm value = FCF1/(WACC – g) = $150,000,000/(0.10 – 0.05) = $3,000,000,000.

To find the value of an equity claim upon the company (share of stock), you must subtract out the market value of debt and preferred stock. This firm happens to be entirely equity funded, and this step is unnecessary. Hence, to find the value of a share of stock, you divide equity value (or in this case, firm value) by the number of shares outstanding. Equity value per share = Equity value/Shares outstanding = $3,000,000,000/50,000,000 = $60.

Each share of common stock is worth $60, according to the corporate valuation model.

wc= 60%, wd = 40%, rd=9%, T=40%, WACC= 9.96%, rs= ?
WACC= wd*rd*(1-T)+(wc*rs)
0.0996 = (0.4)(0.09)(1 – 0.4) + (0.6) * rs
0.0996 = 0.0216 + 0.6rs
0.078 = 0.6rs rs = 13% (cost of common equity)

A $1 million 12.0% 
B 2 million 11.5% 
C 2 million 11.2% 
D 2 million 11.0% 
E 1 million 10.7%
These projects should be accepted as the return on the project is higher than the WACC (10.5%) which means that the projects will be profitable as the returns are higher than the cost of the…...

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