The Saskatchewan Botanicals Company expects a free cash flow of $1.2 million every year forever. Saskatchewan Botanicals currently has no debt, and its cost of equity is 20 percent.
The corporate tax rate is 20 percent. The firm can borrow at 10 percent. All cash flows are perpetual. Saskatchewan Botanicals has 1 million shares outstanding.
a. What is the value of Saskatchewan Botanicals with zero debt?
b. If Saskatchewan Botanicals issues $3 million of debt and uses the proceeds to repurchase stock, determine the number of shares outstanding and the price per share after the repurchase.
c. What is Saskatchewan Botanicals’ cost of equity after the debt issue?
d. Value Saskatchewan Botanicals’ equity using the cost of equity. What is the cash flow to equity?

  • CreatedFebruary 25, 2015
  • Files Included
Post your question