The Saskatchewan Botanicals Company expects a free cash flow of $1.2 million every year forever. Saskatchewan Botanicals
Question:
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?
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...
Step by Step Answer:
a To value Saskatchewan Botanicals we need the cash flows that are available to the shareholders the ...View the full answer
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
