Swasey Final Exam
For today’s “consultative banker” project, your ultimate goal is to advise Gerard, the CEO of Bob’s Bike Shop, on the intrinsic value of his company. You must also answer several questions relating to finance and your analysis.
(Remember: Bob’s Bike is a fantastic bank prospect, so impressing Gerard will be important!) The basic financial statements on the attached spreadsheets and other information below will apply to all sections and each section will be graded as shown. Please round all WACC and PVIF calculations to 4 decimal places and all dollar calculations to the nearest dollar. Please assume today is 1/1/2005 (and, no, consultants do not get “holiday pay!”)
The notes payable to banks represent permanent financing. The interest rate on this debt is the Prime Rate, now 5.50% percent, the same as the rate on new bank loans. The long-term debt consists of 25,000 bonds, each of which has a par value of $1,000, carries an annual coupon of $81.00, and matures in the year 2014. The current Yield-to-Maturity on Bob’s risk class (rated BB+) of new long-term debt is 7.05%. (This can be compared to the current U.S. Treasury long-bond, which carries a 3.7 % rate of interest.) Preferred stock consists of 20,000 7.0% shares, and the current market price is 108% of par. Bob’s expects its Sales to grow at non-constant rates for the next five years (as shown), and then grow at a constant rate of 2.5% thereafter. The firm’s common stock currently sells for $60.00 per share, which yields a current market capitalization of $90 million. Overall, investors have enjoyed a 12% return in the U.S. stock market in recent years, and this is expected to continue. ValuLink assigns a Beta of 1.1 to Bob’s Bike Shop while Bloomberk calculated a Beta of 1.2. Bob’s marginal state-plus-federal tax rate is 40%.
What is the estimated WACC? (20 points)
What is the Estimated Intrinsic Value of...
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