Question 1: Corporate ValuationYou have been hired as a consultant to Advanced Fuels Corporation, to find a way toincrease its value to the shareholders. The CEO has asked you to determine the value of aprivately held company that Advanced Fuels is considering to acquire. You design yourpresentation to the CEO on defining and determining the following items:(a). What are assets‐in‐place? How can their value be determined?(b). What are nonoperating assets? How can their value be determined?©. What is the total value of a corporation? Who has claims on this value?d). The privately held company is owned by a family, 10 million shares of stock. Free CashFlow of this company is $20 million, its WACC is 12%, and FCF is expected to grow at aconstant annual rate of 7%. The company has holdings in marketable securities of $90million. It is financed with $200 million of debt, $250 million of book common equity.1. What is the value of operations?2. What is the total corporate value?3. What is the intrinsic value of equity?4. What is the intrinsic stock price per share?5. What would be a fair offer price (per share) to this company? Explain.e). List the six potential managerial behaviors that can harm a firm’s value?Question 2: Dividend Distribution(a). Mortal Inc. expects to have a capital budget of $500,000 next year. The companywants to maintain a target capital structure with 30% debt and 70% equity, and itsforecasted net income is $400,000. If the company follows the residual dividend policy,how much in dividends, if any, will it pay?(b). Pavlin Corp.’s projected capital budget is $2,000,000, its target capital structure is 40%debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows aresidual dividend policy, how much dividends will it pay or, alternatively, how much newstock must it issue?Question 3 Capital Structure DecisionsThe A. J. Croft Company (AJC) currently has $200,000 market value (and book value) ofperpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest andtaxes (EBIT) are $100,000, and it is a zero growth company. AJC’s current cost of equity is8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstandingselling at a price per share of $60.00.(a). What is AJC’s current total market value and weighted average cost of capital?(b). The firm is considering moving to a capital structure that is comprised of 40% debtand 60% equity, based on market values. The new funds would be used to replace the olddebt and to repurchase stock. It is estimated that the increase in risk resulting from theadditional leverage would cause the required rate of return on debt to rise to 7%, while therequired rate of return on equity would rise to 9.5%. If this plan were carried out, whatwould be AJC’s new WACC and total value? Hint: V= FCF/WACC
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