question archive 1) Nick Frost would like to value Automaton, Inc
1) Nick Frost would like to value Automaton, Inc
Subject:AccountingPrice: Bought3
1) Nick Frost would like to value Automaton, Inc. using the discounted cash flow (DCF) method.
He forecasts Free Cash Flows (FCFs) of $135 million, $145 million, $146 million, respectively for years 1, 2, and 3. After year 3, he assumes FCFs will increase by 2 percent to perpetuity.
Nick gathers the information below (his "input variables") to compute Automaton's cost of equity, debt, and enterprise value.
Cost of Equity
Risk-Free-Rate = 3 percent
Beta = 1.03
Return of Market Portfolio (S&P 500) = 7 percent
Debt Financing
Debt to Equity Ratio = 45 percent
Market Value of Zero-Coupon Bonds = $100 million or 75 percent of par value
Maturity of Zero-Coupon Bonds = 15 years
Tax Rate = 35%
Based on Nick's input variables, what fraction of Automaton's assets are equity financed (i.e. Equity-to-Total capitalization ratio)?
A.
45%
B.
55%
C.
40%
D.
69%
Using the Gordon Growth Model, what is Automaton's Terminal Value? Assume a perpetual growth rate, "g," of 2 percent and WACC of 8.9 percent, and use Nick's FCF forecasts.
A.
$1673
B.
$1641
C.
$2116
D.
$2158
What is Automaton's Enterprise Value? Assume a WACC of 8.9% and constant growth rate of 2 percent to perpetuity and Nick's FCF forecasts.
A.
$2030
B.
$359
C.
$2584
D.
$1998
Based on Nick's input variables, what is Automaton's after-tax cost of debt?.
A.
0%
B.
-1.23%
C.
1.26%
D.
1.90%
Based on Nick's input variables, what is Automaton's Cost of Equity using CAPM?
A.
4.1%
B.
10%
C.
10.2%
D.
7.1%
