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Assignment 2
1. Do Pham is evaluating Phaneuf Accelerateur using the FCFF and FCFE valuation approaches.
Pham has collected the following information (currently in Euro):
i. Phaneuf has net income of 250 million, depreciation of 90 million, capital expenditures
of 170 million, and an increase in working capital of 40 million.
ii. Phaneuf will finance 40% of the increase in net fixed assets (capital expenditures less
depreciation) and 40% of the increase in working capital with debt financing.
iii. Interest expenses are 150 million. The current market of Phaneuf’s outstanding debt is
1800 million.
iv. FCFF is expected to grow at 6% indefinitely, and FCFE is expected to grow at 7%.
v. The tax rate is 30%
vi. Phaneuf is financed with 40% debt and 60% equity. The before-tax cost of debt is 9%
and the before-tax cost of equity is 13%
vii. Phaneuf has 10 million outstanding shares
(a) Using FCFF valuation approach, estimate the total value of the firm, the market
value of equity, and the value per share
(b) Using the FCFE valuation approach, estimate the total market value of equity and
the value per share.
1. A. FCFF0=NI+NCC+Int(1-Tc)-FCInv-WCInv=250+90+150(1-0.3)-170-
40=$235 million
WACC=0.6*13%+0.4*9%*(1-0.3)=10.32%
Firm value=FCFF1/(WACC-g)=235*1.06/(0.1032-0.06)=$5766.20 million
Equity value= firm value-debt value=5766.2-1800=$3966.20 million
Equity value per share=3966.2/10=$396.62
B. Net borrowing=0.4*(170-90)+0.4*40=48 million
FCFE0=NI+NCC-FCInv-WCInv+Net borrowing=250+90-170-
40+48=$178million
Equity value= FCFE1/(re-g)=178*1.07/(0.13-0.07)=$3174.33 million
Equity value per share=3174.33/10=$317.43
2. Proust Company has FCFF of $ 1.7 billion and FCFE of $ 1.3 billion. Proust ’ s WACC is 11
percent, and its required rate of return for equity is 13 percent. FCFF is expected to
grow forever at 7 percent, and FCFE is expected to grow forever at 7.5 percent. Proust
has debt outstanding of $ 15 billion.
A. What is the total value of Proust ’ s equity using the FCFF valuation approach?
B. What is the total value of Proust ’ s equity using the FCFE valuation approach?
To calculate the WACC, value of the firm, total market value of equity, and value per share for
BCC Corporation using the single-stage FCFF approach, we can follow these steps:
Given information:
- Number of shares outstanding: 1,852 million
- Market value of debt: $3.192 billion
- FCFF: $1.1559 billion
- Equity beta: 0.90
- Equity risk premium: 5.5%
- Risk-free rate: 5.5%
- Before-tax cost of debt: 7.0%
- Tax rate: 40%
- Debt financing: 25%
- FCFF growth rate: 4%
1. Cost of Equity:
Cost of Equity = Risk-free rate + Equity Beta * Equity Risk Premium
Cost of Equity = 5.5% + 0.90 * 5.5%
Cost of Equity = 10.45%
2. Cost of Debt:
Cost of Debt = Before-tax cost of debt * (1 - Tax Rate)
Cost of Debt = 7.0% * (1 - 40%)
Cost of Debt = 4.2%
3. WACC:
WACC = (0.75 * 10.45%) + (0.25 * 4.2%)
WACC = 7.8375%
B. Calculate the Value of the Firm:
Value of the Firm = FCFF / WACC
Value of the Firm = $1.1559 billion / 7.8375%
Value of the Firm = $14.746 billion
To summarize:
A. WACC: 7.8375%
B. Value of the Firm: $14.746 billion
C. Total Market Value of Equity: $11.554 billion
D. Value per Share: $6.24