Finance :Company ABC’s total capital consists of $150 million
Subject: Business / Finance
Question
1)Company ABC’s total capital consists of $150 million in debt, $50 million in leased assets, no outstanding preferred stock, $500 million in common stock, and $300 million in retained earnings. Its after-tax specific costs are 7% for the debt, 8% for the leases, and 9% for the equity.
a. Find the Weighted Average Cost of Capital
b. If Company ABC wanted to lower its WACC, what could it do?
c. Why is it important for Company ABC to know its WACC?
Imagine that Company ABC is considering a project that would cost $100 million today, and provide an estimated $25 million of incremental, net cash flow each year for the next six years.
a. What is the Payback Period for this project?
b. What is the NPV of this project, if the discount rate is 8.6%? Should the firm accept this project?
c. What is the IRR of this project? Should the firm accept this project?
Imagine you are the CFO for Ford Motors, and are considering buying a new facility. The facility costs you $220 Million today, and would help you launch a new line for cars produced for the next 7 years. If your discount rate is 6%, based on the incremental, net cash flows below, would you accept the project?
Year Cash Flow
1 30 Million
2 40 Million
3 50 Million
4 60 Million
5 50 Million
6 40 Million
7 30 Million
A private equity firm wants to buy a controlling interest (51%) of Company ABC, hold and manage the company for five years, then sell its ownership stake. Company ABC has 10 million shares outstanding, currently trading at $38 per share. The potential buyer estimates that, including synergies, its 51% portion of Company ABC’s incremental net cash flows for years one through five would be $74.0 million, $84.0 million, $80.0 million, $90.0 million, and $98.0 million, respectively. Additionally, the buyer estimates that its 5.1 million shares could be sold at the end of year five for $170.0 million. The private equity firm wants to use a risk-adjusted discount rate of 5.0%. What is the estimated value of this acquisition in total, and what is the maximum price per share the buyer should be willing to pay?
