UVA Inc. is a company that manufactures and retails eye wear. The firm reported $50 million in after-tax operating income on revenues of $ 500 million in the most recent year. The company has 50 million shares outstanding, trading at $ 8 per share, and $ 150 million in debt at a current market interest rate of 8%; the corporate tax rate is 40%. The firm also has a cash balance of $ 50 million. The stock trades atr1.6 times the book value (of equity) and debt trades at book value (of debt). The unlevered beta for eyewear firms is 0.80; the risk free rate is 5% and the market risk premium is 4%.

a). Estimate the cost of capital for UVA Inc. 

b). UVA had capital expenditures of $ 80 million and depreciation of $ 40 million in the most recent year. If UVA has no working capital investments and expects torn maintain its existing reinvestment rate and return on capital for the next 3 years, estimate the expected annual growth rate for this period.

c). Estimate the value of UVA at the end of the third year, assuming that its growth rate drops to 4% after year 3 and it maintains its existing return on capital and cost of capital.

d). UVA has 10 million options outstanding. If you value each of the options at $rn 12, estimate the value of equity per share based upon your estimated cash flows (from parts b and c).

Answer rating: 100% (QA)

Solution a Cost of Capital is WACC E V x Re D V x Rd x 1 T wher... View the full answer