Delta Corporation is expected to grow at a higher rate of years; thereafter the growth rate will
Question:
Delta Corporation is expected to grow at a higher rate of years; thereafter the growth rate will fall and stabilise at a lower level. The following information has been assembled:
Base Year (Year 0) Information
Revenues | $3 000 million | |
EBIT | $500 million | |
Capital expenditure | $350 million | |
Depreciation | $250 million |
Working capital as a percentage of revenues | 25% | |
Corporate tax rate (for all time) | 30% | |
Paid up equity capital ($10 par) | $400 million | |
Market value of debt | $ 1 200 million | |
Inputs for the high growth phase | ||
Length of high growth phase | 4 years | |
Growth rate in revenues, depreciation , EBIT | 20% | |
and capital expenditure | ||
Working capital as a percentage of revenues | 25% | |
Cost of debt (pre-tax) | 13% | |
Debt-equity ratio | 1 : 1 | |
Risk-free rate | 11% | |
Market risk premium | 7% |
5
Equity beta | 1,129 | |
Inputs for the Stable Growth Period | ||
Expected growth rate in revenues and EBIT | 10% | |
Capital expenditures are offset by depreciation | ||
Working capital as a percentage of revenues | 25% | |
Cost of debt (pre-tax) | 12,14% | |
Risk-free rate | 10% | |
Market risk premium | 6% | |
Equity beta | 1,0 | |
Debt-equity ratio | 2 : 3 |
REQUIRED:
- Calculate the WACC for the high growth phase and the stable growth phase.
- Calculate the value of the firm.
Financial Management Theory and Practice
ISBN: 978-1305632295
15th edition
Authors: Eugene F. Brigham, Michael C. Ehrhardt