It is December 2018. You are analyzing YKNOT Inc., a company headquartered in Waukesha, WI, which...

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It is December 2018. You are analyzing YKNOT Inc., a companyheadquartered in Waukesha, WI, which is manufacturing sailingropes. You look at managerial projections of earnings, and in 2019,the company is expected to produce EBITDA of $18M. In the sameprojections for 2019, you discover that the depreciation andamortization expenses of $2M are expected. And in the sameprojections, the company expects to invest $2.3M in property,plant, and equipment in that year. Additionally, the companyexpects to invest an additional $300,000 into Net Working Capitalin that year. They do not expect to sell any equipment currently inplace. The owners ask you to value the firm and the firm’s equity.You decide to use Discounted Cash Flow methodology to do that. Toprovide a better estimate, you decide to use both WACC and APVmethods. Clearly, you need some additional information for that.You ask managers about their debt policy. They tell you that thecompany currently has about $30M of bank loans, on which thecompany pays an average interest rate of 5% per year. But managersalso tell you that they try to maintain the proportion of debtfinancing at 20% of total capital, which is an industry’s average.Managers say that 2019 is expected to be very representative of thefuture. In the future, they expect the firm’s free cash flow togrow at 3% per year forever. You perform some research and discoverthat the asset beta of firms in the YKNOW’s industry is 1.5. As afinance professional, you know that the current rate on U.S.Treasury 10-year bonds is 2.9% per year, considered risk-free, theprevailing market risk premium is 5%, and the marginal Federal taxrate on U.S. corporations is 21%.
. Please calculate the weighted average cost of capital (WACC)of the firm. b. Using WACC,calculate firm value using discounted cash flow approach. c. Using firm value obtainedin b, calculate the value of the firm’s equity.Calculate firm valueusing adjusted present value (APV) approach assuming 30M debt isheld forever. __ e. Using firmvalue obtained in d, calculate the value of the firm’s equity.

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3.6 Ratings (285 Votes)

a Asset beta of firms in the industry of YKNOT 15 Therefore Asset beta of YKNOT Asset beta of firms in industry Unlevered beta 15 Weight of debt in capital DT 20 Weight of Equity in capital ET 1 DT 1 20 80 So we get DE DT ET 2080 025 Levered Beta or Equity Beta Unlevered Beta 1 1tax rate DE 15 1 121 025 151 79 x 025 15 x 11975 179625 Cost of equity re Risk free rate Levered Beta x market risk premium 29 179625 x 5 29 898125 1188125 Cost of debt interest rate on bank loan rd 5 WACC rd DT1tax rate re ET See Answer

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Transcribed Image Text

It is December 2018. You are analyzing YKNOT Inc., a companyheadquartered in Waukesha, WI, which is manufacturing sailingropes. You look at managerial projections of earnings, and in 2019,the company is expected to produce EBITDA of $18M. In the sameprojections for 2019, you discover that the depreciation andamortization expenses of $2M are expected. And in the sameprojections, the company expects to invest $2.3M in property,plant, and equipment in that year. Additionally, the companyexpects to invest an additional $300,000 into Net Working Capitalin that year. They do not expect to sell any equipment currently inplace. The owners ask you to value the firm and the firm’s equity.You decide to use Discounted Cash Flow methodology to do that. Toprovide a better estimate, you decide to use both WACC and APVmethods. Clearly, you need some additional information for that.You ask managers about their debt policy. They tell you that thecompany currently has about $30M of bank loans, on which thecompany pays an average interest rate of 5% per year. But managersalso tell you that they try to maintain the proportion of debtfinancing at 20% of total capital, which is an industry’s average.Managers say that 2019 is expected to be very representative of thefuture. In the future, they expect the firm’s free cash flow togrow at 3% per year forever. You perform some research and discoverthat the asset beta of firms in the YKNOW’s industry is 1.5. As afinance professional, you know that the current rate on U.S.Treasury 10-year bonds is 2.9% per year, considered risk-free, theprevailing market risk premium is 5%, and the marginal Federal taxrate on U.S. corporations is 21%.. Please calculate the weighted average cost of capital (WACC)of the firm. ______________________________________ b. Using WACC,calculate firm value using discounted cash flow approach.______________________________________ c. Using firm value obtainedin b, calculate the value of the firm’s equity.Calculate firm valueusing adjusted present value (APV) approach assuming 30M debt isheld forever. ______________________________________ e. Using firmvalue obtained in d, calculate the value of the firm’s equity.