All the work has to be shown. You must show the proper financial formula and the inputs to receive full credit for the problem. 1. (weight 10%) Suppose Yon Sun Corporation’s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm’s value of operations, in millions? 2. (weight 10%) Leak Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments). Year: 1 2 Free cash flow: -$50 $100 3. (weight 10%) Based on the corporate valuation model, the value of a company’s operations is $1,200 million. The company’s balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If the company has 30 million shares of stock outstanding, what is the best estimate of the stock’s price per share? Using the following information answer the questions #4, 5, and 6. Powell Plastics, Inc. (PP) currently has zero debt. Its earnings before interest and taxes (EBIT) are $80,000, and it is a zero growth company. PP’s current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00. 4. (weight 10%) Powell Plastics, Inc. (PP) is considering moving to a capital structure that is comprised of 30% debt and 70% equity, based on market values. The debt would have an interest rate of 8%. The new funds would be used to repurchase stock. It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%. If this plan were carried out, what would be PP`s new value of operations? 5. (weight 10%) Now assume that Powell Plastics, Inc. (PP) is considering changing from its original capital structure to a new capital structure with 35% debt and 65% equity. This results in a weighted average cost of capital equal to 9.4% and a new value of operations of $510,638. Assume PP raises $178,723 in new debt and purchases T-bills to hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase? 6. (weight 10%) Powell Plastics, Inc. (PP) then sells the T-bills and uses the proceeds to repurchase stock. How many shares remain after the repurchase, and what is the stock price per share immediately after the repurchase? (Based on the data in the previous two problems) 7. (weight 10%) Cristal Co. is trying to estimate its optimal capital structure. Right now, Cristal has a capital structure that consists of 40% debt and 60% equity, based on market values. (Its D/E ratio is 0.67.) The risk-free rate is 3% and the market risk premium, rM – rRF, is 7%. Currently the company’s cost of equity, which is based on the CAPM, is 14% and its tax rate is 40%. What would be Simon’s estimated cost of equity using the Hamada equation, if it were to change its capital structure to 50% debt and 50% equity? Using the following information answer the questions #8, 9, and 10. General Mills Inc. has debt with a market value of $350,000 and a yield of 11%. The firm`s equity has a market value of $550,000, its earnings are growing at a rate of 6%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 14%. 8. (weight 6%) Under the MM extension with growth, what is General Mills’s cost of equity? 9. (weight 6%) Under the MM extension with growth, what is the value of your firm’s tax shield, i.e., how much value does the use of debt add? 10. (weight 6%) Under the MM extension with growth, what would General Mills `s total value be if it had no debt? Using the following information answer the questions #11 and 12. The Mars Inc. is a zero growth firm with an expected EBIT of $400,000 and a corporate tax rate of 40%. Kimberly uses $600,000 of 11.0% debt, and the cost of equity to an unlevered firm in the same risk class is 15.0%. 11. (weight 6%) What is the value of the firm according to MM with corporate taxes? 12. (weight 6%) What is the firm`s cost of equity?