Green Planet, Inc., a manufacturer of air filter systems for industrial facilities, is considering the addition of a new system to its current product line. The following data has been forecasted:
1. The market value of the firm’s debt is $300,000, and it has $150,000 in marketable securities. The company also has 10,000 shares of preferred stock that pay an annual dividend of $0.75 per share. Investors require a rate of return of 7% on preferred stocks of similar risk. The firm has 100,000 shares of common stock outstanding, and its weighted average cost of capital is 12%. The expected tax rate is 35% in the next two years and 40% after that.
a) Calculate the free cash flow for each of the next four years.
b) After 2021 the firm’s free cash flow is expected to grow at 5% per year indefinitely. What is the value of the stock today?
c) Assume that after 2021 the firm’s free cash flow is expected to grow at 9% per year for four years. After that time, the firm’s free cash flow will grow at 5% indefinitely. Using the two-stage dividend growth model, what is the value of the stock? Calculate your solution twice, first using equation 9-5 on page 260 and then using the FAME_TwoStageValue user-defined function.
e) Assume that the transition between 9% and 5% will be gradual rather than instantaneous. The forecasted transition period is 3 years. Using the H Model, what is the value of the stock? Calculate your solution twice, first using equation 9-8 on page 264 and then using the FAME_HModelValue user-defined function.
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