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Problem:

Private equity investors are planning to provide financing to Jones Machinery and has approached your firm to perform a valuation assessment of Jones. Jones Machinery has 3 million shares outstanding and a target capital structure consisting of 30 percent debt. The debt interest rate is 8 percent. Assume that the risk-free rate of interest is 3 percent and the return on the market is 9 percent. Jones' historical free cash flow has averaged $4 million per year and is expected to grow at a constant rate of 5 percent a year; its beta is 1.2. Jones has $6 million in debt. The tax rate of Jones Machinery is 18 percent.

Required:

Question 1: Calculate the required rate of return on equity using CAPM for Jones?

Question 2: Calculate weighted average cost of capital of Jones?

Question 3: Calculate the value of operations of Jones?

Question 4: Calculate the value of the Jones' equity?

Note: Please explain comprehensively and give step by step solution.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91169282

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