The company Sweet Leisure plc. is a European company that invests in tourism industry. The company traditionally invests in summer vacations, but is now focusing on alternative investments in the tourism industry, for diversification of its investment portfolio, the absorption of seasonality and the smooth annual cash flow. They are currently looking to invest in Alpine Inc., a company that makes mountain sports equipment You were asked to assist the CFO of Sweet Leisure plc., in the analysis of Alpine Inc. The data that you have collected about Alpine Inc. when preparing your analysis, are following:

• The company has 40 million shares in circulation, with a current price of 8 euros per share.

• The share trades twice the value of its equity.

• The company has a total debt of 150 million euros with an interest rate of 8%.

• The current price of the debt is equal to its book value.

• The company announced a net profit of 20 million euros, 50 million euros operating profit after taxes and sales of 500 million euros the last year.

• The company tax rate is 40%.

• The company had capital expenditures of 40 million euros and depreciation 25 million in the last year. In the long run, capital expenditures and depreciation will be offset against each other, while the company is not expected to take on new debt.

• The company has no working capital investments and expects to maintain it existing reinvestment rate and return on capital for the next 3 years.

• The company expects an increase in net debt of 5 million Euros for next year.

• The beta of the company is 1,025.

• The risk-free return is 5% and the market risk premium is 4%.

A) Calculate the cost of capital for Alpine Inc.

B) Calculate the expected annual growth rates for net profits and operating income after taxes for the next 3 years.

C) Calculate the value of Alpine at the end of the third year, assuming that its net profit growth rate drops to 2% after year 3 and maintains the existing return on equity and the cost of equity.

D) Calculate the value of Alpine by applying the Free Cash Flow to Equity method (FCFE) and the corresponding fair value per share that Sweet Leisure plc. would be willing to pay in order to buy Alpine shares.

E) Would you advise the CFO to buy Alpine shares at the current purchase price?

*I think I have answered A correctly: Ks=r_f + b(r_m - r_f) = 5% +1,025*4% = 0,091 = 9,1%

Answer rating: 100% (QA)

A Calcul ate the cost of capital for Alpine Inc ANS WER The cost of capital for Alpine Inc is 13 10 WORK ING The cost of equity for Alpine Inc is calculated using the Capital Asset Pricing Model CAP M ... View the full answer