Assume that today is December 31, 2008, and that the following informa

QUESTION

Assume that today is December 31, 2008, and that the following information applies to Vermail airlines:-After-tax operation income [EBIT(1-T) for 2009 is expected to be $500 million.-The depreciation expense for 2009 is expected to be $100 million.-The capital expenditures for 2009 are expected to b¦
Net cash flow during 2009 = EBIT(1-T) “ cap. exp. = 500 “ 200 = 300 m$ (Depreciation is not a cash flow, so not accounted) Debt = 3000 m$ Equity = 200*F m$ (F is face value of stock “ not indicated) Total capital = 3000 200*F m$ Weight of debt, Wd = 3000/(3000 200*F) Weight of Equity, We = 200*F/(3000 200*F) r(E) = cost of equity = 14% WACC, k = 10% g = 6% growth in cash flow. Firms value at the start of 2009 = cash flow in 2009 /(1 k) value in 2009/(1 k0 = 300/1.1¦

)/1.1 m$ (cash flow in 2010 will be 500m$, assuming no capital expenditure is there hence after ) = 300/1.1 500/((0.10 “ 0.06)*1.1) m$ = 11636.36 m$ = Debt Market value of Equity Capital investment in 2009 = 3000 200* P 200 m$ ( P is market price of stock) => P = (11636.36 “ 3200)/200 ($) => P = 42.18 ($) (ANSWER)

ANSWER:

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