Assignment
Prepare a Microsoft Excel spreadsheet with responses to the following problems adapted from the text. All calculations must be shown.
ABC Incorporated shares are currently trading for $34 per share. The firm has 1.23 billion shares outstanding. In addition, the market value of the firm's outstanding debt is $3 billion. The 10-year Treasury bond rate is 6.75%. ABC has an outstanding credit record and has earned an AAA rating from the major credit rating agencies. The current interest rate on AAA corporate bonds is 6.5%. The historical risk premium for stocks over the risk-free rate of return is 5.0 percentage points. The firm's beta is estimated to be 1.3 and its marginal tax rate, including federal, state, and local taxes is 30%.
• What is the cost of equity?
• What is the after-tax cost of debt?
• What is the cost of capital?
Siebel Incorporated, a non-publicly traded company, has 2009 after-tax earnings of $25 million, which are expected to grow at 3 percent annually into the foreseeable future. The firm is debt-free, capital spending equals the firm's rate of depreciation; and the annual change in working capital is expected to be minimal. The firm's beta is estimated to be 1.5, the 10-year Treasury bond is 5.5 percent, and the historical risk premium of stocks over the risk-free rate is 6.5 percent. Publicly-traded Rand Technology, a direct competitor of Siebel's, was sold recently at a purchase price of 10 times its 2009 after-tax earnings, which included a 15 percent premium over its current market price. Aware of the premium paid for the purchase of Rand, Siebel's equity owners would like to determine what it might be worth if they were to attempt to sell the firm in the near future. They chose to value the firm using the discounted cash flow and comparable recent transactions methods. They believe that either method provides an equally valid estimate of the firm's value.
• What is the value of Siebel using the DCF method?
• What is the value using the comparable recent transactions method?
• What would be the value of the firm if we combine the results of both methods?
Format your paper consistent with APA guidelines.