Exe Plc. is expected to generate (before-tax) cash of 1.5m by the end of the year...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Exe Plc. is expected to generate (before-tax) cash of £1.5m by the end of the year on an asset base which comprises £5m of fixed assets and £1m of working capital. Depreciation is 10% of the fixed asset base each year. It has a WACC of 8%. The firm has £2.5m of debt (book and market values are equal) outstanding at an interest rate of 6%. Cash taxes are payable at 30% of net profits. The firm can expand at 5% p.a. in perpetuity whilst maintaining returns to scale ("replacement" of assets = "depreciation") if debt also increases at 5% pa. (a) What are the value of the firm and the value of the equity? (b) What is the cost of equity capital? (c) Assume that the firm wishes to maintain leverage at a constant level and without issuing external new equity or grows at the sustainable growth rate. What will the dividend payout ratio need to be? (d) Show that an identical answer using all four methods: DDM, FCF, RIVM and P/E. Exe Plc. is expected to generate (before-tax) cash of £1.5m by the end of the year on an asset base which comprises £5m of fixed assets and £1m of working capital. Depreciation is 10% of the fixed asset base each year. It has a WACC of 8%. The firm has £2.5m of debt (book and market values are equal) outstanding at an interest rate of 6%. Cash taxes are payable at 30% of net profits. The firm can expand at 5% p.a. in perpetuity whilst maintaining returns to scale ("replacement" of assets = "depreciation") if debt also increases at 5% pa. (a) What are the value of the firm and the value of the equity? (b) What is the cost of equity capital? (c) Assume that the firm wishes to maintain leverage at a constant level and without issuing external new equity or grows at the sustainable growth rate. What will the dividend payout ratio need to be? (d) Show that an identical answer using all four methods: DDM, FCF, RIVM and P/E.
Expert Answer:
Answer rating: 100% (QA)
SOLUTION a To calculate the value of the firm we can use the formula Value of the Firm Present Value of Free Cash Flows WACC First lets calculate the free cash flows We are given that the beforetax ca... View the full answer
Related Book For
Intermediate accounting
ISBN: 978-0077647094
7th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson
Posted Date:
Students also viewed these finance questions
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Sheehan Corp. is forecasting an EPS of $3.00 for the coming year on its 500,000 outstanding shares of stock. Its capital budget is forecasted at $800,000, and it is committed to maintaining a $2.00...
-
Study the information given below and answer the following questions: (25 Marks) 1.1 Calculate the Payback Period of both machines (answers expressed in years, months and days). (5 marks) 1.2 Which...
-
Observing and Correcting Employee Actions is the same as Discipling Employees Question 2 options: True False
-
Schroeder Baking Corporation uses a process costing system in its large-scale baking operations. The Mixing Department is one of the companys processing departments. In the Mixing Department in July,...
-
Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows: Project Investment Required...
-
You have been engaged by Central Savings and Loan Association to examine its financial statements for the year ended December 31, 19X1. The CPA who examined the financial statements at December 31,...
-
Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost productivity....
-
15. The 4 kg block just completed the trip shown. If no work was done, calculate its initial velocity. 120J is lost between B & C. The final velocity is 10m/s 12m 10M/S 8m W=0 12 mu, +mgh = 1/2mV2 'F...
-
Amy Lloyd is interested in leasing a new Honda and has contacted three automobile dealers for pricing information. Each dealer offered Amy a closed-end 36-month lease with no down payment due at the...
-
A mass resting on a horizontal, frictionless surface is attached to one end of a spring; the other end is fixed to a wall. It takes 3.9 J of work to compress the spring by 0.14 m. If the spring is...
-
The following information pertains to a pension plan for Guccii Company that recognizes only the minimum amortization of unrecognized gains and losses using the corridor approach. Account Balances...
-
On June 3 0 , 2 0 2 4 , Georgia - Atlantic, Incorporated leased warehouse equipment from IC Leasing Corporation. The lease agreement calls for Georgia - Atlantic to make semiannual lease payments of...
-
Choose any TWO companies listed in the property sector of the Main Market of Bursa Malaysia. Analyse the companies financial position and performance based on the relevant profitability, debt, and...
-
Tennessee Vols Inc. currently (2024) does not pay a dividend. However, the company is expected to pay a $1.00 dividend two years from today (2026). The dividend is then expected to grow at a rate of...
-
In this problem, we want to create a spreadsheet to help someone estimate their income in retirement. To do this, we will have them enter several numbers: the amount of money currently in savings,...
-
There are a set of points that are twice the distance from the point (0,5) as they are from (0,15). Find the equation of these points.
-
31. What is the income that can be received over 15 years from $500,000 earning 6% annually? 32. What is the semiannual payment required to retire $50,000 in debt over 5 years at 8% compounded...
-
Manufacturers Southern leased high-tech electronic equipment from International Machines on January 1, 2013. International Machines manufactured the equipment at a cost of $200,000. The equipment has...
-
Jerry's Ice Cream Parlor is considering a marketing plan to increase sales of ice cream cones. The plan will give customers a free ice cream cone if they buy 10 ice cream cones at regular prices....
-
On September 3, 2013, the Robers Company exchanged equipment with Phifer Corporation. The facts of the exchange are as follows: Required: Record the exchange for both Robers and Phifer. The exchange...
-
S1 Ltd and S2 Ltd belong to the same capital gains group. In May 2020, S1 Ltd transferred a chargeable asset to S2 Ltd. The original cost of this asset to S1 Ltd was 10,000 and its market value in...
-
The ordinary share capital of W Ltd (which is a trading company) is owned 30% by X Ltd, 25% by Y Ltd and 45% by Z Ltd. All of these companies are UK resident and they prepare accounts to 31 March....
-
E Ltd has taxable total profits of 800,000 for the year to 31 March 2024 and receives no dividends. For many years, the company has owned 65% of the ordinary shares of F Ltd and 30% of the ordinary...
Study smarter with the SolutionInn App