All questions below analyze the same company. The information below will be needed to answer all...

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Finance

All questions below analyze the same company. The informationbelow will be needed to answer all questions. Consider thefollowing information regarding ABC Corporation.
2009
2010
Sales ($ millions)
1000
1112
Cost of Goods Sold ($ millions)
500
556
Other Expenses ($ millions)
100
111
Depreciation ($ millions)
100
100
Interest Expense ($ millions)
50
55
Total Current Assets ($ millions)
600
700
Net Fixed Assets ($ millions)
1800
2000
Total Current Liabilities ($ millions)
450
550
Long-term Liabilities ($ millions)
900
975
• The firm’s plowback ratio is 60%
• The firm’s tax rate is 40%
• The company has 30 million shares outstanding. The currentstock price is $35.
• The company has two bond issues outstanding. The first issueis 100,000 bonds that have YTM of 5%, coupon rate of 7%, face valueof $1000, and mature in 7 years. The second issue is 500,000 bondswith YTM of 8%, face value of $1500, and mature in 13 years. Thesebonds are currently selling for $1200.
• The expected return on the market is 11%. The risk-free rateis 4%.
• ABC’s beta is 2.15
1. Use market values to find the percentage of the companythat is debt-based (Wd).
2. Use market values to find the percentage of the companythat is equity-based (We).
3. Use CAPM to find the cost of equity (Re).
4. Find a market-value based weighted average of the bonds’YTMs (Rd).
5. Use the answers to #1-#4 to find the company’s WACC.
6. Find the company’s internal growth rate (IGR).
7. Use the IGR from #6 and the required return on the stockfrom #3. Use the financial data to find the current dividend. Whatdoes the dividend growth model predict the stock price to be?
8. Which of the following might be a valid reason for thelarge discrepancy between the predicted stock price from #7 and theactual stock price of $35?
a. The market expects the company to grow at a faster ratethan the internal growth rate.
b. The market expects the company to grow at a slower ratethan the internal growth rate.
c. The market requires a higher return than the one you haveusing CAPM?
d. The company is doing very poorly.
e. The company is doing very well.
9. Find the firm’s 2010 total cash flow.
10. Find the firm’s 2010 cash flow to shareholders.

Answer & Explanation Solved by verified expert

3.8 Ratings (445 Votes)

You have asked 10 questions in a single post I am addressing the first four of them Please post the balance questions separately All financials are in 1 Use market values to find the percentage of the See Answer

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All questions below analyze the same company. The informationbelow will be needed to answer all questions. Consider thefollowing information regarding ABC Corporation.20092010Sales ($ millions)10001112Cost of Goods Sold ($ millions)500556Other Expenses ($ millions)100111Depreciation ($ millions)100100Interest Expense ($ millions)5055Total Current Assets ($ millions)600700Net Fixed Assets ($ millions)18002000Total Current Liabilities ($ millions)450550Long-term Liabilities ($ millions)900975• The firm’s plowback ratio is 60%• The firm’s tax rate is 40%• The company has 30 million shares outstanding. The currentstock price is $35.• The company has two bond issues outstanding. The first issueis 100,000 bonds that have YTM of 5%, coupon rate of 7%, face valueof $1000, and mature in 7 years. The second issue is 500,000 bondswith YTM of 8%, face value of $1500, and mature in 13 years. Thesebonds are currently selling for $1200.• The expected return on the market is 11%. The risk-free rateis 4%.• ABC’s beta is 2.151. Use market values to find the percentage of the companythat is debt-based (Wd).2. Use market values to find the percentage of the companythat is equity-based (We).3. Use CAPM to find the cost of equity (Re).4. Find a market-value based weighted average of the bonds’YTMs (Rd).5. Use the answers to #1-#4 to find the company’s WACC.6. Find the company’s internal growth rate (IGR).7. Use the IGR from #6 and the required return on the stockfrom #3. Use the financial data to find the current dividend. Whatdoes the dividend growth model predict the stock price to be?8. Which of the following might be a valid reason for thelarge discrepancy between the predicted stock price from #7 and theactual stock price of $35?a. The market expects the company to grow at a faster ratethan the internal growth rate.b. The market expects the company to grow at a slower ratethan the internal growth rate.c. The market requires a higher return than the one you haveusing CAPM?d. The company is doing very poorly.e. The company is doing very well.9. Find the firm’s 2010 total cash flow.10. Find the firm’s 2010 cash flow to shareholders.