FCFF Valuation with Preferred Stock in the Capital Structure.
Welch Corporation uses bond, preferred stock, and common stock financing. The market value of each of these sources of financing and the before tax required rates of return for each are given below:
|
Market Value |
Required Return |
|
|
Bonds |
$400,000,000 |
8.0% |
|
Preferred stock |
$100,000,000 |
8.0% |
|
Common stock |
$500,000,000 |
12.0% |
|
Total |
$1 ,000,000,000 |
Other financial information:
Net income available to common shareholders = $1 10,000,000
Interest expenses = $32,000,000
Preferred dividends = $8,000,000
Depreciation = $40,000,000
Investment in fixed capital = $70,000,000
Investment in working capital = $20,000,000
Net borrowing = $25,000,000
Tax rate = 30 percent
Stable growth rate of FCFF = 4.0 percent
Stable growth rate of FCFE = 5.0 percent
1. Calculate Welch Corporation’s WACC.
2. Calculate the current value of FCFF.
3. Based on forecasted FCFF, what is the total value of the firm and the value of equity?
4. Calculate the current value of FCFE.
5. Based on forecasted FCFE, what is the value of equity?