Question

 Watson Thomas is planning to value BCC Corporation, a provider of a variety of industrial metals and minerals. Thomas uses a single-stage FCFF approach. The financial information Thomas has assembled for his valuation is as follows:

 I. The company has 1,852 million shares outstanding.

 II. The market value of its debt is $3.192 billion.

 III. The FCFF is currently S1.1559 billion.

 IV. The equity beta is 0.90; the equity risk premium is 5.5 percent; the risk-free rate is 5.5 percent.

 V. The before-tax cost of debt is 7.0 percent.

 VI. The tax rate is 40 percent.

 VII. To calculate WACC, he will assume the company is financed 25 percent with debt.

 VIII. The FCFF growth rate is 4 percent. Using Thomas' information, calculate the following:

 A) WACC.

 B) Value of the firm.

 C) Total market value of equity.

 D) Value per share.

Answer 1

Cost of Equity = Risk Free Rate + Beta * (Risk Premium) = 5.50% + 0.90 * 5.50% = 10.45%

After tax Cost of Debt = Cost of Debt * (1 - Tax) = 7% * (1 - 40%) = 4.20%

WACC

Weighted Cost = Weight * Cost

2. Value of Firm = FCFF * (1 + Growth) / (WACC - Growth Rate) = 1.1559 B * 1.04 / 4.89%

Value of Firm = 24.5961 Billions

3. Market Value of Equity = Value of Firm - Value of Debt = 24.5961 Billion - $3.192 Billion = $21.404 Billion

4. Value per Share = MV of Equity / Shares O/s = 21.404 B / 1.852 B = $11.56 Per Share