Firm Value Assignment | Homework For You
Smart Inc. is a public firm with 25 million shares outstanding. You are doing a valuation analysis of Smart Inc. and you estimate its free cash flow in the coming year to be $40 million. You expect the firm’s free cash flows to grow by 4% per year in subsequent years. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of Smart’s equity beta. However, you do have the following data for another firm in the same industry:
| Equity Beta | Debt Beta | Debt-Equity Ratio |
| 1.8 | 0.4 | 1.5 |
Smart Inc. has a much lower debt-equity ratio of 0.5, which is expected to remain stable, and Smart’s debt is risk-free. Its corporate tax rate is 21%, the risk-free rate is 5%, and the expected return on the market portfolio is 10%.
Using this information, you found out that:
1) Smart Inc’s equity beta = 1.44.
2) Smart Inc’s cost of equity = 12.2%
3) Smart Inc’s firm value = $ million
4) Smart Inc’s share price = $
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