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CHAPTER 16: Estimating Equity Value per Share > QUESTIONS AND SHORT PROBLEMS
QUESTIONS AND SHORT PROBLEMS
In the problems following, use an equity risk premium of 5.5 percent if none is specified.
- ABV Inc. has earnings before interest and taxes of $250 million, expected to grow 5% a year forever; the tax rate is 40%. Its cost of capital is 10%, its reinvestment rate is 33.33%, and it has 200 million shares outstanding. If the firm has $500 million in cash and marketable securities and $750 million in debt outstanding, estimate the value of equity per share.
- How would your answer to the previous problem change if you were told that ABV had options outstanding for 50 million shares and that each option had a value of $5?
- If you were told that the average exercise price of the 50 million options in the previous problem was $6, estimate the value per share for ABV using the treasury stock approach.