The analyst is analyzing the financial statements of another Yettobe corporation (the state- ments are in million dollars). Its stock is currently traded at $50 and it has 20 million shares outstanding. The firm?s market value of debt is 120 millions. The shareholders require a return of 15% and before-tax cost of debt is 10%. Assume that the expected long-term growth rates in FCFF, FCFE, dividends, and residual income are 4%. Using the constant growth model to compute the following:

a. ?What is firm value?

b. ?What is the intrinsic equity value per share using FCFF?

c. ?What is the intrinsic equity value per share using FCFE?

d. ?What is the intrinsic equity value per share using DDM?

e. What is the intrinsic equity value per share using residual income model?

f. ?Based on our valuations, should the analyst give a buy/hold/sell recommendation for Yettobe stock?

Transcribed Image Text:

Balance sheet Current assets Cash Accounts receivable Inventory Total current assets Fixed assets Gross property, plant, and equipment Accumulated depreciation Total fixed assets Total assets Current liabilities Accounts payable Short-term debt Total current liabilities Long-term debt Total liabilities Shareholders' equity Commonstock Retained earnings Total equity Total liabilities and owner's equity 2018 17 23 4 44 920 (50) 870 914 14 50 64 222 286 548 80 628 914 2019 18 20 3 41 1,000 (100) 900 941 12 60 72 227 299 548 94 642 941 Income statement 2019 Revenue 2,500 (-) Cost of goods sold 2,000 Gross profit 500 250 50 200 20 180 36 144 (-) SG&A (-) Depreciation EBIT (-) Interest expense EBT (-) Taxes (at 20%) Net Income Balance sheet Current assets Cash Accounts receivable Inventory Total current assets Fixed assets Gross property, plant, and equipment Accumulated depreciation Total fixed assets Total assets Current liabilities Accounts payable Short-term debt Total current liabilities Long-term debt Total liabilities Shareholders' equity Commonstock Retained earnings Total equity Total liabilities and owner's equity 2018 17 23 4 44 920 (50) 870 914 14 50 64 222 286 548 80 628 914 2019 18 20 3 41 1,000 (100) 900 941 12 60 72 227 299 548 94 642 941 Income statement 2019 Revenue 2,500 (-) Cost of goods sold 2,000 Gross profit 500 250 50 200 20 180 36 144 (-) SG&A (-) Depreciation EBIT (-) Interest expense EBT (-) Taxes (at 20%) Net Income

Answer rating: 100% (QA)

a Firm value Market value of debt Equity Value 120 Equity Value 120 Equity Val... View the full answer