Answer:
Value of the company is $140.70
Explanation:
We need first of all turn the equity beta from an unlevered to a levered beta with the below formula:
BU = BL / [1 + ((1 - Tax Rate) x Debt/Equity)]
BL=BU*[1 + ((1 - Tax Rate) x Debt/Equity)]
BU is levered beta
BL is the levered beta which is unknown
tax rate is 30% or 0.3
debt/equity =0.4
BU is 1.7
BL=1.7*[1 + ((1 - 0.3) x 0.4)
BL=1.7*(1+(0.7*0.4)
BL=1.7*(1+0.28)
BL=1.7*1.28
BL=2.176
Cost of equity=Rf+beta*market risk premium
Rf is the risk free rate of 6%
market risk premium is 11%
cost of equity=6%+2.176*11%
cost of equity=6%+23.94%
cost of equity =29.94%
In valuing the company the stock price formula below can be adapted
stock price=Do*(1+g)/(r-g)
Do is the dividend but can be replaced with a proxy free cash flow,since dividend per share is meant to compute price of one share,but FCF is to calculate the value of the entire company.
The free cash flow is computed below
FCF=EBIT*(1-t)+depreciation and amortization-capital expenditure-net increase in working capital
FCF=$56*(1-0.3)+$5.6-$5.3-$2.7
FCF=$36.8 million
g is the growth rate of FCF at 3%
r is the cost of equity of 29.94%
value of the company=$36.80*(1+3%)/(29.94%-3%)
value of the company=$36.80*1.03/0.2694
=$140.70
