Nick Frost would like to value Automaton, Inc

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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%

1. 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%

2. 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

 3. 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

4. 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%

5. 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%