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Debt outstanding is $140 million. Show all your work for credit). A. Do you think that the list below represents valid comparable companies? B. What is the current enterprise market value of Pellagra? C. Suppose you are asked to value Pellagra Inc. Given the following information. What is your estimate of equity? Of enterprise value? 2. Tell-Talk Inc. Is a company that provides domestic and international long distance, regional and local communications services, cable (broadband) television, and Internet communications services.
For the past two years, it has paid an annual dividend of $2. 31 per share; however, the compound rate f growth in dividends per share over the past 10 years has been 6. 2 percent. The beta of Tell-Tack stock measured over the past three years is 1. 10. Its debt, which makes up 32 percent of total capital, currently yields 7. 28 percent, while long term Treasury bonds are yielding 5. 63 percent. The market risk premium (geometric) is at 5. 9 percent.
Tell-Talk shares are currently trading at $46. 25 per share. Calculate Tell-Talks cost of equity using: a) the Capital Asset Pricing Model (CAMP), and b) the dividend growth model (look up the constant-growth dividend model if you don’t recall it. Make sure you pick up the right dividend (ODL or the forecast dividend, not DO the last dividend). Which method would you prefer and why? 3. The following is a five-year discounted cash flow (DOC) forecast for Intermediates Electric, Inc. An electric utility company [Use spreadsheet Workbook Chapter 9 Problem 8]: ($ MM) Year 2 Year 3 Year 4 Year 5 Operating income 2,039 2,325 2,169 2,430 2,615 Taxes 712 813 777 870 937 Depreciation and amortization 1 ,299 1,413 1,470 1 ,527 1 ,584 Change in working capital (169) 294 (223) 163 (205) Capital expenditures/asset sales (1,754) (3,432) 1,180 (2,720) (2, 133) Free cash flow 703 213) 3,819 530 924 Cash flows over the next five years are expected to fluctuate significantly due to key acquisitions and restructuring measures planned by Intermediates.
After the fifth year, however, cash flow is expected to stabilize. Economists expect the long-term inflation rate to stabilize at 2. 0 percent, and Intermediates expects real growth in sales to be 2. 0 percent or less. Management has determined that the cost of capital is 10. 28 percent. [Use spreadsheet Valuation Workbook provided] Estimate Intermediates’ enterprise value. 4. Vanguard Office Supplies is a nationwide retail chain that offers office supplies ND office furniture.
Company management has decided that, from both a competitive and a cost-cutting standpoint, Vanguard should offer its own private-label brands for products like student notebooks, fillers, ledgers and journals, bond and linen paper, and other products. To accomplish this objective, Vanguard is considering the purchase of Omega Paper, a manufacturer of paper products and notebooks. A five-year income forecast for Omega is given, along with other pertinent information. Vanguard plans to keep Omega’s debt-equity ratio at its current level.