WHO Corporation uses bonds, 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: WHO Corporation Capital Structure (in millions) Market value Required return
Bonds 500 8.0%
Preferred stock 300 9.8%
Common stock 800 13.0%
Total 1,600
Other information (in millions)
Net income available to common shareholders = 110
Interest expense= 40
Preferred dividends= 24
Depreciation = 40
Investment in fixed capital= 70
Investment in working capital= 20
Net borrowing= 30
Tax rate = 34%
Stable growth rate of FCFF= 5.00%
Stable growth rate of FCFE= 5.80%
a. Calculate WHO’s WACC. (2 marks)
b. Calculate the current value of FCFF. (2 marks)
c. Based on forecasted year 1 FCFF, what is the total value of WHO and the value of its equity? (2 marks)
d. Calculate the current value of FCFE. (2 marks)
e. Based on forecasted year 1 FCFE, what is the value of equity? (2 marks)