Boston Cube Inc. currently has no debt, annual free cash flows of $52 million and an...

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Finance

Boston Cube Inc. currently has no debt, annual free cash flowsof $52 million and an average tax rate of 34%. Free cash flows areexpected to grow by 7% per year forever.
Using the CAPM, the firm estimates that its cost of equity is12%. The risk-free rate is 2% and the expected equity market riskpremium is 7%. There are 8 million shares outstanding.
The firm is considering a new capital structure with adebt-to-capital ratio of 50%. The company would issue bonds torepurchase its own shares at the current market price. Aninvestment bank has estimated that the yield to maturity on thecompany's bonds would be 6%.
1.) What is the stock price before the recapitalization?
2.) What will be the WACC after the recapitalization?
3.) What will be the stock price after the recapitalization?

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4.1 Ratings (493 Votes)

1 Annual Free Cash Flow FCF 52 million FCF Growth Rate 7 and Cost of Equity 12 Therefore Firm Value 52 x 107 012 007 11128 million Number of Shares Outstanding See Answer

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Boston Cube Inc. currently has no debt, annual free cash flowsof $52 million and an average tax rate of 34%. Free cash flows areexpected to grow by 7% per year forever.Using the CAPM, the firm estimates that its cost of equity is12%. The risk-free rate is 2% and the expected equity market riskpremium is 7%. There are 8 million shares outstanding.The firm is considering a new capital structure with adebt-to-capital ratio of 50%. The company would issue bonds torepurchase its own shares at the current market price. Aninvestment bank has estimated that the yield to maturity on thecompany's bonds would be 6%.1.) What is the stock price before the recapitalization?2.) What will be the WACC after the recapitalization?3.) What will be the stock price after the recapitalization?