Question

show work and be neat please

9. Two public companies (Jensen and Jackson) operate in the same industry, will generate exactly the same operating profit, and have identical net operating assets. What is the weighted average cost of capital for each company? Which company will have a lower stock price? Jensen Total Debt Total Shareholder Equity Cost of Debt Cost of Equity $64,000 3.5% 5.5% Jackson $32,000 $32,000 5.0% 7.0% 10. Assume the following expected free cash flows for Peterson Corporation for 2017 Current 2017 $4,651 Forecast Horizon 2019 2020 $5,128 $5,384 2018 $4,884 Free cash flows to the firm (FCFF) Terminal Year $5,766 2021 $5,653 The company has net nonoperating obligations (NNO) of $12,000 and 3,000 shares outstanding Calculate the per share stock price using the FCFF information above, a discount rate of 7%, and a terminal growth rate of 2%. 11. Foraker Products is a manufacturer and distributor of numerous food products. The company has a book value of $22.98 per share. Foraker Products is part of the food processing industry which has an industry PB ratio of 2.15. Using industry information, estimate the intrinsic value of Foraker Products' equity per share? A) $ 8.91 B) $41.17 C) $17.81 D) $49.41 12. Nova Components is a manufacturer of computer parts. The company has a book value of $2,417,762 In addition the company has 402,500 common shares issued and outstanding. Nova Components is part of the computing industry which has an industry PB ratio of 6.10. Using industry information, estimate the intrinsic value of Nova Components' equity per share? A) $11.11 B) $36.64 C) $67.74 D) $30.53

Answer 1

Solution to QUESTION-9

Weighted Average Cost of Capital (WACC) for Jensen Company

Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

= [3.50% x ($0 / $64,000)] + [$5.50% x ($64,000 / $64,000)]

= [3.50% x 0.00] + [5.50% x 1.00]

= 0.00% + 5.50%

= 5.50%

Weighted Average Cost of Capital (WACC) for Jackson Company

Weighted Average Cost of Capital (WACC) = [After Tax Cost of Debt x Weight of Debt] + [Cost of equity x Weight of Equity]

= [5.00% x ($32,000 / $64,000)] + [7.00% x ($32,000 / $64,000)]

= [5.00% x 0.50] + [7.00% x 0.50]

= 2.50% + 3.50%

= 6.00%

DECISION

Here, the Jackson Company will have the Lower stock price since it has the highest Weighted Average Cost of Capital (WACC) of 6.00% as compared to the WACC of Jensen Company.