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Amariendo, Inc. is a newly public firm with 11.5 million shares outstanding. You are doing a...

Amariendo, Inc. is a newly public firm with 11.5 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow in the coming year to be 14.92 million, and you expect the firms free cash flows to grow by 4.2% per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMR's equity beta. However, you do have beta data for UAL, another firm in the same industry. AMR has a much lower debt-equity ratio of 1.39, which is expected to remain stable, and its debt is risk-free, AMRCorporate tax rate is 35%, the risk-free rate is 5.5% and expected return on the market portfolio's is 11%.

UAL Equity Beta=1.95 Debt Beta=0.39 Debt-Equity Beta= 1.3

a. Estimate AMR 's equity cost of capital

compute UAL's asset beta

b.Estimate AMR's share price

Can you please do a step by step simplified

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Answer #1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

DEBT EQUITY BETA IS ACTUALLY DEBT-EQUITY RATIO.

Home nert Page Layout Formulas Data Review View dd-Ins Cut E AutoSum ー E ゴWrap Text ta copy. B 1 u. ,_a. ars-函Merge & Center, $, % , 弼,8 C Conditional Format CeInsert Delete Format Formatting, as Table w styles. ▼ ㆆ ▼ Sort &Find & 2 ClearFe Select Edting Format Painter Clipboard Alignment Number Cells NE1 MV MW MX MY MZ NA NB NC ND NE NF NG NH NI EQUITY BETA DEBT BETA DEBT-EQUITY RATIO 1.95 0.39 1.3 UAL 4 5 6 UAL ASSET BETAWEIGHT OF EQUITY X EQUITY BETA +WEIGHT OF DEBT DEBT BETA UAL ASSET BETA(1/2.3)*1.95 + (1.3/2.3) (0.39)- 1.0683 (ROUNDED TO 4 DECIMAL) AMR HAS DEBT, WHICH IS RISK FREE SO EQUITY BETAASSET BETA OF UALX (1+D/E) 9 10 1.0683 X (1 1.39)- 2.55 (ROUNDED TO 2 DECIMAL) USING CAPM MODEL ke = EQUITY COST OF CAPITAL = Rf + BETA(Rm-Rf) ke = EQUITY COST OF CAPITAL = 5.5% + 2.55*(11%-5.5%) ke-EQUITY COST OF CAPITAL- 19.53% 12 13 14 15 16 17 18 19 i1 1 WACCWe*Ke Wd*kd*(1-t) WACC- (1/2.3)*19.53% + (1.3/2.3)*5.5%(1-035) WACC = 10.51% H İ (EV PE EPS DIV ABNORMAL APV ROSS | deberk 1 MARGIN MONEY al tax . PB ROPİ eEVA MVA LEVERAGED BUY SWAP distress BRIGHAN CAP GAIN 福 130% 16-01-2019Home nert Page Layout Formulas Data Review View dd-Ins Cut E AutoSum Calibri ー E ゴWrap Text General ta copy ▼ ,_a. ars-函Mer

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