You have been asked to value Moon Ltd, a stable company with a growth rate of zero.

The company reports annual revenue of $200 million and a pre-tax operating margin of 25%.

The corporate tax rate is 40%.

The companys working capital is constant and capital expenditure is spent only to replace

depreciation.

The company has $150 million in debt outstanding and has a yield to maturity equal to 6%.

The companys bonds trade at par. The company has 30 million shares outstanding and its

stock is trading at $15. The company has a cost of equity equal to 9%. The companys current

capital structure proxies its target capital structure.

The company has excess cash of $0.5 million.

Required:

(a) Estimate Moons after-tax Weighted Cost of Capital (WACC).

(b) Estimate the companys enterprise value using the Discounted Cash Flow (DCF) approach.

(c) Estimate the companys equity value and its stock price.

(d) Is the Discounted Cash Flow (DCF) approach better than the approach of using the valuation multiples (e.g. the Price/Earnings multiple) in valuing a firm? Why?