Question

Prokter and Gramble (PKGR) has historically maintained a debt-equity ratio of approximately 0.23. Its current stock price is S47 per share, with 2.6 billion shares outstanding. The firm enjoys very stable demand for its products, and c it has a low equity beta of 0.575 and can borrow at 4.0%. Just 20 basis points over the risk-free rate of 3.8%. The expected retum of the market is 10.4%, and PKGR's tax rate is 25%. a. This year, PKGR is expected to have free cash flows of $6.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock price? b. PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.575, it beliaves its borrowing costs will rise only slightly to 4.3%. If PKGR announces that it will raise its debt-equity ratio to 0.575 through a leveraged recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings a. This year, PKGR is expected to have free cash flows of $6.5 billion. What oonstant expected growth rate of free cash flow is consistent with its current stock price? The constant expected growth rate o ree cash flow is consistent with its current stock pnce is % ound to ivo decimal paces.

Answer 1

Solutin a) rld o.is/ l. IS-13 .04% 86.96% Re 357.40. 375X(105%-35%) 5.78% 124. 2 8.63 CS Scanned with CamScanner 142.3

6.3 -142.88xg 25-3) u2.83 g , 1.5 パito 'pi .. J : 121.20 loss-121.20-14우 83 a share loss -RI. 63/g, 3-940 pes