Problem 1Problem 2Pull 36 months of monthly price data from Yahoo finance for each comp company.
: Find the WACC for a firm with the following characteristics. A few years ago the firm issued $4,000,000 debt with a coupon rate of 4%; currently that debt is trading with a yield to maturity of 5.5% and a value of $3,500,000. The firm has 1,000,000 common shares outstanding at a value of $6/share. You look up the asset beta for firms in the same industry (SIC) code and determine that value is 1.15. The firm plans on keeping its D/E ratio constant (at the current level) going forward and the tax rate is expected to be 35%. The beta of the firm’s debt is estimated as 0.10, the risk free rate is 3% and the market return is 9.8%.
: Suppose you want to estimate the cost of equity for a private company in the food industry that has similarities to Hormel Foods (HRL), Tyson Foods (TSN) and Conagra Foods (CAG).
Using the adjusted Close price calculate 35 monthly returns for each comp.
Calculate a levered beta for each comp using a regression analysis (use ^GSPC as the market return).
Un-lever the comp betas assuming that each company will have a constant D/E and a debt beta of 0. (find D from the “Key Statistics” section of Yahoo@ Finance “Total Debt (mrq); E is the Market Cap (intraday). You can ignore cash.
Assume that the private company will also have a constant D/E ratio and re-lever your estimate of the asset beta to get a levered beta for the firm (assume that currently D is 5 billion and E is 20 billion and that the tax rate is 35%).
Assume a market risk premium of 5.5% and a risk free rate of 2.8% … what is the levered cost of equity?
Problem 3: Calculate the Project and Equity Free Cash Flows for the following scenario. We want to finance a project with 30% debt (70% equity). We expect $1,000,000 in sales for next year; COGS to be 55% of sales; depreciation will be $400,000 and offset with $400,000 in new CAPEX. Assume that Year 1 is the first year of a perpetuity with no growth (you get the t1 cash flow for ever). The firm’s cost of debt is 4% (assume the debt is perpetual and you never pay down any principal); the cost of equity is 12%; the tax rate is 35%. Hint: to determine the EFCF you will need to determine the value of the firm and the value of “D” so you can find the interest payment.
Problem 4: If the firm in Problem 4 were to decide to use 50% debt, how would the Project Free Cash Flow be affected
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