Using the cash flows in Exhibit 9, calculate the Weighted Average Cost of Capital (WACC), and then

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Question:

Using the cash flows in Exhibit 9, calculate the Weighted Average Cost of Capital (WACC), and then find the intrinsic value of the stock. Assume a market risk premium of 6.0%, a corporate tax rate of 35%, and a debt beta of 0.30.

Exhibit 9 Forecasted Operating Assumptions and Cash flow Items ($ Millions)


		July-Dec	Fiscal Year Ending December 31st
		2012	2013	2014	2015	2016	2017


Operating Assumptions
	REO Production (tons, thousands)	6.00	25.00	40.00	40.00	40.00	40.00
	Percentage of REO allocated to Metals Production	0.63	0.32	0.35	0.35	0.35	0.35
	Metals production (tons, thousands)	3.76	8.00	14.00	14.00	14.00	14.00

	REO Price ($/kg)	43.20	20.60	19.20	19.47	19.74	20.02
	Metal/Alloy Price ($/kg)	104.69	58.10	63.06	63.94	64.84	65.74
	REO Cost ($/kg)	26.10	9.30	6.00	6.08	6.17	6.26
	Metal/Alloy Cost ($/kg)	82.11	34.36	37.36	37.88	38.41	38.95

	Revenue
	REO	$ 96.77	$ 350.20	$ 499.20	$ 506.19	$ 513.28	$ 520.46
	Metals/Alloys	$ 393.63	$ 464.80	$ 882.80	$ 895.16	$ 907.69	$ 920.40
	Total Revenue	490.40	815.00	1,382.00	1,401.35	1,420.97	1,440.86

	Cost of Sales
	REO	58.46	158.10	156.00	158.18	160.40	162.64
	Metals/Alloys	308.74	274.90	523.00	530.32	537.75	545.27
	Total Cost of Sales	367.20	433.00	679.00	688.51	698.15	707.92

	Gross Profit
	REO	38.30	192.10	343.20	348.00	352.88	357.82
	Metals/Alloys	84.90	189.90	359.80	364.84	369.94	375.12
	Total Gross Profit	123.20	382.00	703.00	712.84	722.82	732.94
	SG&A	57.00	100.00	100.00	101.40	102.82	104.26
	Other Expense	17.00	9.00	10.00	10.14	10.28	10.43
	EBITDA	49.20	273.00	593.00	601.30	609.72	618.26

Cash Flow Items
	Capital Expenditures	334.00	70.00	45.00	45.00	45.00	45.00
	Depreciation	24.50	125.00	125.00	125.00	125.00	125.00
	Net Working Capital (1)	300.51	258.43	288.58	292.78	297.04	301.35

Gross Margin		25.1%	46.9%	50.9%	50.9%	50.9%	50.9%
Revenue Growth (2)			20.0%	69.6%	1.4%	1.4%	1.4%