Q. The "Claw" Corporation has a market value of equity of $30,000,000, and a market value of debt of $10,000,000. Further, it has 1,000,000 shares outstanding. Assume the beta of the equity is 1.5 and YTM of existing debt of 4%. The market risk premium is 6%, and the risk-free rate is 3%. Assume the marginal tax rate is 30%. As a financial analyst, you are projecting the financial statements based on your own private beliefs! You estimate the FCFF for the next five years: Year 1 Year 2 Year 3 Year 4 Year 5 After year five the FCFF will increase at a constant rate of 2%, in line with inflation estimates. (This means Year 6 cash flows will be 2% greater than year 5 cash flows). $2,100,000 $2,200,000 $2,300,000 $2,400,000 $2,500,000 1. According to CAPM, what is the expected return on equity? 2. What is the D/E ratio for the firm? 3. What is the WACC of the firm? 4. Given all this information, what is the total value of the firm? (Hint: What is the PV of the FCFF) 5. What is the current value per share of Claw? (Hint: Use Enterprise Value Formula and assume no cash!) 6. The Claw Corporation is currently trading for $21.00 per share. According to your projections, the common equity is: . Undervalued . Cannot Be Determined Fairly Valued Overvalued
Q. The "Claw" Corporation has a market value of equity of $30,000,000, and a market value of debt of $10,000,000. Further, it has 1,000,000 shares outstanding. Assume the beta of the equity is 1.5 and YTM of existing debt of 4%. The market risk premium is 6%, and the risk-free rate is 3%. Assume the marginal tax rate is 30%. As a financial analyst, you are projecting the financial statements based on your own private beliefs! You estimate the FCFF for the next five years: After year five the FCFF will increase at a constant rate of 2%, in line with inflation estimates. (This means Year 6 cash flows will be 2% greater than year 5 cash flows). 1. According to CAPM, what is the expected return on equity? 2. What is the D/E ratio for the firm? 3. What is the WACC of the firm? 4. Given all this information, what is the total value of the firm? (Hint: What is the PV of the FCFF) 5. What is the current value per share of Claw? (Hint: Use Enterprise Value Formula and assume no cash!) 6. The Claw Corporation is currently trading for $21.00 per share. According to your projections, the common equity is: - Undervalued - Cannot Be Determined - Fairly Valued - Overvalued
