Union Pacific Railroad reported net income of $770 million after interest expenses of $320 million in a recent financial year. (The corporate tax rate was 36%.) It reported depreciation of $960 million in that year, and capital spending was $1.2 billion. The firm also had $4 billion in debt outstanding on the books, was rated AA (carrying a yield to maturity of 8%), and was trading at par
(up from $3.8 billion at the end of the previous year).
The beta of the stock is 1.05, and there were 200 million shares outstanding (trading at $60 per share), with a book value of $5 billion. Union Pacific paid 40% of its earnings as dividends and working capital requirements are negligible. (The Treasury bond rate is 7%.)
a. Estimate the FCFF for the most recent financial year.
b. Estimate the value of the firm now.
c. Estimate the value of equity and the value per share now.