Home / Questions / A friend of yours is trying to value the equity of a company and knowing that you have re...
A friend of yours is trying to value the equity of a company and, knowing that you
have read this book, has asked for your help. So far she has tried to use the FCFE
approach. She estimated the cash flows to equity to be as follows:
Sales €800.00
− CGS −450.00
− Depreciation −80.00
− Interest −24.00
Earnings before taxes (EBT) €246.00
− Taxes (0.35 × EBT) −86.10
= Cash flow to equity €159.90
She also computed the cost of equity using CAPM as follows:
kE = kF + bE(Risk premium) = 0.06 + (1.25 × 0.084) = 0.164 or 16.4%
where, the beta is estimated for a comparable publicly traded company.
Using this cost of equity, she estimates the discount rate as
WACC = xDebtkDebt pretax(1 − t) + xos kos
= 0.20 × 0.06 × (1 − 0.35) + 0.80 × 0.165 = 0.14, or 14%
Based on this analysis, she concludes that the value of equity is €159.9 million/0.14 =
€1 142 million.
Assuming that the numbers used in this analysis are all correct, what advice would
you give your friend regarding her analysis?
Apr 16 2021 View more View Less
team
Mar 17 2020f'(x) > 0 f(x) increasing concave up f(x) increasing possible inflection pt "(x)=0 f'(x)=0 relative minimum concave up f(x) levels off possible inflection pt relative max...
May 16 2021The income statement should be prepareda. before the retained earnings and balance sheet.b. after the retained earnings and balance sheet.c. after the balance sheet and b...
May 16 2021CASE 4–19 Ethics and the Manager; Understanding the Impact of Percentage Completion on ProfitThad Kostowski and Carol Lee are production managers in the Appliances Divisi...
Jun 27 2020Which of the following reasons contributes to the growth slowdown in capital accumulation and output per worker under the Solow growth model? >Constant population growth ...
May 01 2021The function x(t) is shown below. Sketch the function y1 (t)-x(-t) in the space provided. 2. x(t) 10 0 2 4 t(sec) -10 Answer: y1 (t) 10 2 t(sec) -10 >
Jun 04 2020What is the Lewis dot diagram for iodine molecule?
May 16 2021Which of the following statements about the short run and long run is true?A) The number of firms in the industry is fixed in the short run, but in the long run the numbe...
Mar 14 2020Choose any three central beliefs of Christianity as presented by at least three authors and show how those beliefs have been traditionally understood among Christians
Aug 01 2020From the viewpoint of staff personnel, the major reason(s) for line-staff conflict is/are that line personnel I. Do not make proper use of staff personnel. II. ...
Dec 11 2017