As a financial analyst, after conducting a careful accounting, financial statement, and prospective analysis of a company, you are now developing an independent assessment of the value of the firm to develop an investment recommendation for your clients. Using the financial statements and additional notes provided for the firm in the attached excel file (Final Exam, tab Alpha Tech BS & IS), develop a valuation for the firm using the DCF model. Additional information and assumptions for the firm that you have made include:

a. The book value of the firm?s debt equals its market value.

b. The estimated market beta for the firm is 0.46, the expected risk-free rate is 2.5%, and the expected market premium is 5%.

c. The firm?s stock closed at $55.85 on March 31, 2017 (fiscal year end), and the stock is currently trading at $59.50 d. The firm?s statutory tax rate is 37%.

e. Based on a historical analysis, adjusted by a strategic and industry assessment, you have developed the following forecasts for the firm for the next four years, (2018-2021):

Sales Growth 8% Net operating profit margin (NOPM) 6.8% Net operating asset turnover (NOAT) 1.41 Terminal Period 1%?

1. Develop an Estimate for weighted average cost of capital for the firm?

a. Estimate the company?s average pretax borrowing cost.?

b. Assuming the book value of the firm?s debt equals its market value, estimate the firm?s cost of debt capital.?

c. Estimate the cost of equity capital for the firm.?

d. Based on (b) and (c) estimate the firm?s weighted average cost of capital (WACC)?

2. Estimating Valuation?

a. Using the discounted cash flow model (DCF), estimate the value of a share for the firm?s common stock.?

b. Based on your valuation, provide an investment recommendation for your clients.

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Balance Sheet, Amount in Millions except share and per share data Assets Current Assets Cash and cash equivalents Receivables, net Merchandise inventories Prepaid expenses & other current assets Total current assets Property, plant and equipment, net Other long-term assets Other intangibles, net Goodwill Total Assets Current liabilities: Accounts payable Accrued liabilities Notes payable Current portion of long-term debt & capital leases Total current liabilities Long-term debt Other long-term liabilities Deferred income taxes, net Pension Liability Total liabilities Shareholders' equity: Common stock¹ Additional paid-in capital Retained earnings Accumulated other comprehensive income/(loss) Treasury stock at cost² Total firm shareholders' equity Noncontrolling interest Total equity Total liabilities and stockholders' equity 31-Mar 2017 420 1,454 832 280 2,986 3,830 610 2,086 3,476 12,988 1,402 920 1,065 755 4,142 6,082 690 754 886 12,554 105 573 3,569 (931) (2,943) 373 61 434 12,988 31-Mar 2016 640 1,188 1,340 247 3,415 3,304 516 1,543 2,450 11,228 1,189 840 234 761 3,024 5,037 592 643 785 10,081 105 522 4,654 (1,006) (3,130) 1,145 2 1,147 11,228 Balance Sheet, Amount in Millions except share and per share data Assets Current Assets Cash and cash equivalents Receivables, net Merchandise inventories Prepaid expenses & other current assets Total current assets Property, plant and equipment, net Other long-term assets Other intangibles, net Goodwill Total Assets Current liabilities: Accounts payable Accrued liabilities Notes payable Current portion of long-term debt & capital leases Total current liabilities Long-term debt Other long-term liabilities Deferred income taxes, net Pension Liability Total liabilities Shareholders' equity: Common stock¹ Additional paid-in capital Retained earnings Accumulated other comprehensive income/(loss) Treasury stock at cost² Total firm shareholders' equity Noncontrolling interest Total equity Total liabilities and stockholders' equity 31-Mar 2017 420 1,454 832 280 2,986 3,830 610 2,086 3,476 12,988 1,402 920 1,065 755 4,142 6,082 690 754 886 12,554 105 573 3,569 (931) (2,943) 373 61 434 12,988 31-Mar 2016 640 1,188 1,340 247 3,415 3,304 516 1,543 2,450 11,228 1,189 840 234 761 3,024 5,037 592 643 785 10,081 105 522 4,654 (1,006) (3,130) 1,145 2 1,147 11,228

Answer rating: 100% (QA)

Firstly lets tackle the Weighted Average Cost of Capital WACC Step 1 Calculate the Cost of Debt The average pretax borrowing cost is found using the Interest Expense from the Income Statement divided ... View the full answer