I am trying to value Computer Industries (CI), a privately held computer manufacturer. Computer Industries is currently all-equity financed with 10 mm shares outstanding. They have $30 mm in excess cash. I expect CI to generate $8 mm in (after tax) free cash flow next year, and I expect their FCF to grow at a constant rate of 3% thereafter.

I observe the following information for Dell Computers (DELL), a publicly traded firm in the same industry and considered of comparable risk to CI:

The current treasury yield curve is:

I estimate the market risk premium (relative to the 10-year Treasury rate) to be 5%. The corporate tax rate is 25%.

a.) Estimate of the asset cost of capital () for Computer Industries?

b.) What price should I be willing to pay today for one share of Computer Industries stock?

Now suppose Computer Industries decides to change their financial structure to 25% debt (75% equity). They anticipate a cost of debt () of 4%.

c.) What will be Computer Industries equity cost of capital () after the change in financial structure?

d.) Would you expect this change in financial structure to impact the enterprise value of CI? Why or why not?

\\( r_{A} \\) \\begin{tabular}{|c|c|c|c|c|} \\hline 6 months & 1 year & 2 year & 5 year & 10 year \\\\ \\hline \0.6 & \1 & \1.25 & \1.5 & \2 \\\\ \\hline \\end{tabular} \\( r_{D} \\) \\( r_{E} \\) \\begin{tabular}{|l|c|} \\hline Stock price per share & \\( \\$ 20 \\) \\\\ \\hline Shares outstanding & \\( 5 \\mathrm{~mm} \\) \\\\ \\hline Equity beta & 1.4 \\\\ \\hline Total Debt (book value) & \\( \\$ 60 \\mathrm{~mm} \\) \\\\ \\hline Equity (book value) & \\( \\$ 70 \\mathrm{~mm} \\) \\\\ \\hline Excess Cash & \\( \\$ 10 \\mathrm{~mm} \\) \\\\ \\hline Debt rating & \\( \\mathrm{A}+ \\) \\\\ \\hline Debt YTM & \3.0 \\\\ \\hline \\end{tabular}