Question

The hybrid model used in this chapter discounts for-casted cash flows over a planning period and adds this to an estimate of the firm’s continuing value, which is estimated using comps. The length of the planning period is typically three to ten years. What are some considerations that arise in determining the length of the planning period, during which time detailed cash flow estimates are made?
Cost of debt— Estimated borrowing rate is 6.125% with a marginal tax of 27.29%, resulting in an after-tax cost of debt of 4.5%.
Cost of equity— Levered equity beta for Toy Co. is .777; using the capital asset pricing model with a ten-year Treasury bond yield of 4.66% and a market risk premium of 7.67% produces an estimate of the levered cost of equity of 10.57%.
Other— Diluted shares of common equity outstanding on December 31, 2009: 422,040,500 shares; closing stock price: $ 19.49; debt value outstanding on December 31, 2009: $ 618,100,000.
WACC— using the target debt to value ratio of 6.99%, WACC is approximately 10.14%.


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  • CreatedNovember 13, 2015
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