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    lars1112
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    The document outlines the key financial information needed to calculate the value of XYZ, a pharmaceutical company. It provides XYZ's initial cash flow, long-term growth rate, cost of debt, equity risk premium, tax rate, and capital structure. It then lists the formulas needed to calculate XYZ's weighted average cost of capital and ultimately its firm value.

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    The document outlines the key financial information needed to calculate the value of XYZ, a pharmaceutical company. It provides XYZ's initial cash flow, long-term growth rate, cost of debt, equity risk premium, tax rate, and capital structure. It then lists the formulas needed to calculate XYZ's weighted average cost of capital and ultimately its firm value.

    Droits d'auteur :

    Attribution Non-Commercial (BY-NC)
    Téléchargez comme PPT, PDF, TXT ou lisez en ligne sur Scribd
    Signaler comme contenu inapproprié
    0 vues1 page

    Assignement

    Transféré par

    lars1112
    The document outlines the key financial information needed to calculate the value of XYZ, a pharmaceutical company. It provides XYZ's initial cash flow, long-term growth rate, cost of debt, equity risk premium, tax rate, and capital structure. It then lists the formulas needed to calculate XYZ's weighted average cost of capital and ultimately its firm value.

    Droits d'auteur :

    Attribution Non-Commercial (BY-NC)
    Téléchargez comme PPT, PDF, TXT ou lisez en ligne sur Scribd
    Signaler comme contenu inapproprié
    sur 1

    The Cost of Capital: an illustration

    XYZ is in the pharmaceutical business. Next year’s cash flows will be 150 and they are expected to grow
    by 5% per year over the next 40 years.
    The long-term Central Bank rate is equal to 4% and XYZ may borrow at a rate 75 bp (basis point ) higher
    than this rate.
    For the time being the Equity Risk Premium (ERP) is around 6.6% and XYZ beta is 2.1.
    XYZ target capital structure is 40% Equity - 60% Debt and the tax rate is 32%.
    What should be XYZ’s value?

    kD = rf + firm’s credit spread


    CF1
    V0 = D E
    ( k0 - g ) k0 = kD (1 - ) + kE
    D+E D+E

    kE = rf +  x ERP
    kD = 4% + 0.75% = 4.75%

    kE = 4% + 2.1 x 6.6% = 17.86%

    k0 = 4.75% x .68 x .6 + 17.86% x .4 = 9.08%

    V0 = 150 / (9.08% - 5%) = 3,676.47


    -1 - Finance and Valuation

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