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Elena-2011 [213]
3 years ago
9

Patrick Company expects to generate freeminuscash of​ $120,000 per year forever. If the​ firm's required return is 12​ percent,

the market value of debt is​ $300,000, the market value of preferred stock is​ $70,000, and the company has​ 100,000 shares of stock outstanding. What is the value of​ Patrick's stock?
Business
1 answer:
photoshop1234 [79]3 years ago
4 0

Answer:

$6.3 per share

Explanation:

There are two method of Valuation of the firm

  • Weighted average cost of the capital (WACC)
  • Free cash flow to equity (FCFE)

We have to calculate the value of the firm using FCFE. Free cash flow to equity (FCFE) is the amount of cash flow generated by the business and potentially available for distribution among the stockholders.

Value of firm = Free cash flow / required rate of return = $120,000 / 12% = $1,000,000

Market value of Equity = Total value of firm - Market value of Debt - Market value of Preferred share

Market value of Equity = $1,000,000 - $300,000 - $70,000 = $630,000

Value of​ Patrick's stock = Market Value of equity / shares of stock outstanding = $630,000 / 100,000 = $6.3 per share

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14.88%

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Market value of common stock outstanding = 220,000 * $27 = $5,940,000

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Wayco's total financing market value = $5,940,000 + $1,025,000 + $556,600 = $7,521,600

Weighted average cost of capital = [($5,940,000 / $7,521,600) * 16.8%] + [($1,025,000 / $7,521,600) * 9.1%] + [($556,600 / $7,521,600) * 7.6% * (1 - 34%)] = 0.1488, or 14.88%

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This information relates to Ayayai Real Estate Agency.
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Answer:

Oct. 1

Dr Increase Assets

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Cr Increase stockholders'equity

Cr Common stock $29,100

Oct. 2

Dr No Effect

Dr No Effect $0

Cr No Effect

Cr No Effect $0

Oct. 3

Dr Increase Assets

Dr Office furniture $3,610

Cr Increase Liabilities

Cr Accounts payable $3,610

Oct. 6

Dr Increase Assets

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Cr Increase Revenues

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Oct. 10

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Cr Increase Revenues

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Cr Decrease Assets

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Oct. 30

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Cr Decrease Assets

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Preparation of the debit-credit analysis for each transaction.

Oct. 1

Dr Increase Assets

Dr Cash $29,100

Cr Increase stockholders'equity

Cr Common stock $29,100

(Being To record common stock)

Oct. 2

Dr No Effect

Dr No Effect $0

Cr No Effect

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Cr Accounts payable $3,610

( Being To record purchase of office furniture)

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( Being To record service revenue)

Oct. 10

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Oct. 27

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Oct. 30

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3 years ago
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