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The company has $2,500$ million shares outstanding.

The market value of its debt is $\$3.88$ billion.

The current level of FCFF is $\$1.9$ billion.

The equity beta is $1.5$

The market equity risk premium is $7.0$ percent

The risk free rate is $4\%$

The pre-tax cost of debt is $8\%$

The firm’s tax rate is $40\%$

The firm is assumed to be financed $20\%$ with debt and the remainder with common stock.

The FCFF is expected to grow at a $7$ percent rate for the foreseeable future.

I'm trying to calculate WACC and Value of the firm. I know the formulas for both but what I can't figure out is how to calculate market value of firms equity without having price per share.

lulu
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doolgasg
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  • maybe look up EPS ( earnings per share) ? also maybe look at the quantitative finance stack exchange ? –  Aug 31 '17 at 19:38

1 Answers1

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You don't need the market value, but just the ratio $D/E =0.25$ (and you can find the equity as $E=4D$). $$ \mathrm{WACC}=k_e\frac{E}{E+D}+k_d (1-t)\frac{D}{E+D}=k_e\frac{1}{1+D/E}+k_d (1-t)\frac{D/E}{1+D/E}=12.56\% $$ where $k_e=r_f+\beta_e \times MRP=4\%+1.5\times 7\%=14.5\%$, $k_d=8\%$ and $t=40\%$.

The Value of the firm $V$ is $$ V=\frac{\mathrm{FCFF}}{\mathrm{WACC}-g}=34.17\,\mathrm{billions} $$ where $g=7\%$.

alexjo
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