D Ltd expects annual demand of 40000 units for the next 5 years and has...
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D Ltd expects annual demand of 40000 units for the next 5 years and has 5,000,000 shares outstanding. Accounting department estimate for fixed costs is $450000 annually excluding depreciation on non-current assets having cost of $1800000, variable cost is $200 per unit. Straight line method of depreciation is to be used assuming useful life of 5 years. No further capital expenditure is expected during next 5 years. Finance department expects a constant growth rate of 5% in free cash flows. The marketing department estimates that D Ltd will let the contract at a selling price of $440 per unit. Engineering department estimates net working capital investment equal to 10% of operating profit annually. If risk free rate is 11%, beta 2.00, market rate of return 20%, before tax cost of debt 15% weight of debt 40%, weight of equity 60% and face a marginal tax rate of 32% on this project. a) Compute value of firm using free cash flow model. b)Compute fair price per share and discuss under what circumstances its a good investments.
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