Equity Market Capitalization Business Questionnaire Solution

 Equity Market Capitalization Business Questionnaire

Table of Contents

Order Number	Y47874HDUEW
Type of Project	Essay/Research Paper
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Writing Style	APA/Harvard/MLA/CHICAGO
Citations	5
Page Count	3-15

Description/Paper Instructions

000 Equity Market Capitalization Business Questionnaire

1. Company A has 2000 shares outstanding and current stock price is $300/share. Accordingly, company A’s balance sheet is as follows (in market value).

Surplus cash $150,000 Debt $0

 

Fixed assets and net working capital $450,000 Equity market capitalization $600,000

 

$600,000 $600,000

 

A shareholder holds one share of the stock. Now, company A decides to payout the surplus cash (only for the current period). (only put

numbers, no comma or $ sign)

 

(a). If company A decides to payout all the surplus cash as dividends, what’s the new equity market capitalization of the company on the balance

sheet? $

 

What’s the new stock price per share? $ /share

 

How much can the shareholder receive as dividend/share? $ /share

 

What’s shareholder’s wealth (per share) in the current period including both cash income and value of the stock held by the shareholder? $ /share

 

(b). If company A decides to payout all the surplus cash as share repurchase, how many shares can it repurchase?  shares

 

What’s the number of shares outstanding now?  shares

 

What’s the new equity market capitalization of the company on the balance sheet? $

 

What’s shareholder’s wealth in the current period including both cash income and value of the stock held by the shareholder? Assume the

shareholder still holds one share of the stock. $ /share

 

2. The market-value balance sheet and other financial data for Company XXX are listed below.

Asset value $1,000,000 Debt $400,000

Equity $600,000

$1,000,000 $1,000,000

Cost of debt 6%

Cost of equity 12%

Marginal tax rate 21%

You are the financial manager of company XXX is considering a project that requires $310,000 investment today and expects to generate a

perpetual cash flow of $30,000 each year (after-tax). This after-tax cash flow takes no account of interest tax shields on debt supported by

the project. Assume no depreciation. The company issues $80,000 debt at 6% interest rate to finance the project and will keep the

debt amount fixed once issued. The issuing cost is 4000. You want to calculate APV of the project. Please show all your work to get full

credit (keep four decimals including percentage to avoid rounding error).

 

(a). What’s cost of capital used to calculate base-case NPV (in %)?

 

(b). What’s base-case NPV?

 

(d). What’s PV of interest tax shields?

 

(e). What’s the APV of the project considering both PV of interest tax shield and issuing cost?

3. You are the financial manager of a company with market value of debt $300,000 and equity $700,000. The cost of debt is 5% for your company and cost of equity is 11%. Your company is tempted to acquire Company Z. You want to estimate the value of Company Z. The following table sets out the information that you need to forecast company Z’s free cash flows (the highlighted numbers are all forecasted numbers). You can assume the cash flow in year 0 has already occurred when you calculate the value of the business. Value horizon is 2 years. From year 3 onward, you assume a long-term growth rate of 3.5% each year. Company Z has a debt ratio (D/V) of 20% and will keep the debt ratio constant. Assume the cost of debt for company Z is also 5%. Marginal tax rates for both companies are 21%.

0

1

2

3

Sales

170,000

171,000

172,000

176,000

Cost of goods sold

136,000

136,700

137,500

138,300

Net working capital

100,000

103,800

108,200

112,350

Depreciation

7,000

7,000

7,000

7,000

Gross fixed assets

160,000

175,000

188,000

202,000

Investment in fixed assets

(change in gross fixed assets)

13,000

Investment in working capital

4,000

You will use “adjust discount rate” approach to calculate the value of Company Z (keep four decimals). Show are your inputs to get full credit. Please don’t attach your work in excel here, I won’t grade it.

(a). What’s the discount rate you will use to discount the free cash flow given that Company Z’s debt ratio is different from your company? [9 points]

(b). Forecast Company Z’s after-tax profit over the next 3 years. Show your work to derive the after-tax profit in year 2 (don’t need to show after-tax profit in year 1 and 3)? [5 points]

(c). Calculate free cash flows over the next 3 years. Specifically, what’s the free cash flow in year 2 (don’t need to show your work to drive free cash flow in year 1 and 3)? [7 points]

(d). What’s the present value of horizon value? [7 points]

(e). What’s the present value of the firm? [6 points]

Equity Market Capitalization Business Questionnaire

Excellent	The essay demonstrates exemplary comprehension of the relevant content by thoroughly as well as correctly discussing the relevant information; identifying as well as explaining all of the 3 fundamental aspects; using correct terminology; describing the reasoning next to key points/claims; as well as substantiating points with several accurate as well as illuminating examples, as necessary or useful. There are no gaps in the necessary answer.
Good	Scholarly sources that are credible are employed to successfully support statements that are, as the most part, clear as well as fairly expressed. With just a few minor inaccuracies, APA 6th Edition is utilized. There are a few small typos in the references and/or citations. There is some reliance on dubious sources.
Satisfactory	Because of certain improper terminology and/or confusing wording, the work is frequently confused and difficult to understand; thoughts may be disjointed, meandering, and/or repetitious. a lack of structure; and/or grammatical, spelling, and punctuation mistakes.
Poor	The essay demonstrates a lack of understanding of the related documents by failing to address or improperly addressing the relevant; failing to identify or incorrectly trying to explain key concepts/ideas; ignoring as well as incorrectly attempting to explain key points/claims as well as the rationale behind them; and/or inaccurately or improperly using terminology.
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Quality of Response	Because of its intelligent growth and mature manner, this study merits attention. It provides a compelling analysis of or reaction to the text, expanding on that response using well-chosen examples and arguments. The sixth paper demonstrates that its author can typically use appropriate words, employ advanced phrases successfully, and adhere to written English rules.
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