Example 1

Year CFE Int CFF

1 250.00 90.00 340.00
2 262.50 94.50 357.00
3 275.63 99.23 374.85
4 289.41 104.19 393.59
5 303.88 109.40 413.27
TV at end of year 5 3,946.50 6,000.00

Cost of equity 12%

Cost Of Capital 9.94%

Calculate Value of Equity

Calculate Value of Firm

Example 2

Merck & Company has 1.13 billion shares traded at a market v

and R1.918 billion in book value of outstanding debt (with an e
of 2 billion). The equity has a book value of R5.5 billion, and th
1.10. The firm paid interest expenses of R160 million in the mo
is rated AAA and paid 35% of its income as taxes. The thirty-ye
rate is 6.25%, and AAA bonds trade at a spread of twenty basi
treasury bond rate. The benchmark equity market has returne
the last 30 years.
A. What are the market value and book value weights on debt

B. What is the cost of equity? 

C. What is the after-tax cost of debt? 

D. What is the cost of capital?

ded at a market value of R32 per share,
ng debt (with an estimated market value
5.5 billion, and the stock has a beta of
0 million in the most recent financial year,
axes. The thirty-year government bond
ad of twenty basis points (0.2%) over the
arket has returned 11.75% annually over

weights on debt and equity? 

Example 3

The following are the betas of the equity of four companies, 
and their debt/equity ratios. 

Company Beta D/E ratio

A 1.18 54.14%
B 0.91 11.29%
C 1.15 33.91%
D 1.05 45.50%

Tax Rate is 40%
Calculate unlevered Beta of each firm
 If B increases Debt Equity to 30 % what will be its new beta
Example 4 Year 1 Year 2
Amt in Cr
Revenues 544.00 620.00
(Less) Operating Expenses (465.10) (528.50)
(Less) Depreciation (12.50) (14.00)
= Earnings before Interest and 
Taxes  66.40 77.50
(Less) Interest Expenses - -
(Less) Taxes (25.30) (29.50)
= Net Income 41.10 48.00
Working Capital  175.00 240.00
CAPEX 15.00 18.00
Working Capital Year 0 180.00

Estimate FCFE for Year 1 and

year 2
Example 5

ABC Ltd.  reported earnings per share of $2.35 in 1993, and expected earnings growth o
year from 2014 to 2018, and 6% a year after that. The capital expenditure per share was
depreciation was R1.125 per share in 2013. Both are expected to grow at the same rate a
from 2014 to 2018. Working capital is expected to remain at 5% of revenues, and revenu
were R1,000 million in 2013 are expected to increase 6% a year from 2014 to 2018, and
after that. The firm currently has a debt ratio (D/(D+E)) of 5%, but plans to finance futu
needs (including working capital investments) using a debt ratio of 20%. The stock is ex
a beta of 1.00 for the period of the analysis, and the treasury bond rate is 6.50%. (There 
shares outstanding.) 

A. Assuming that capital expenditures and depreciation offset each other after 1998, esti
per share. 
pected earnings growth of 15.5% a 
penditure per share was R2.25, and 
o grow at the same rate as earnings 
% of revenues, and revenues which 
 from 2014 to 2018, and 4% a year 
but plans to finance future investment 
 of 20%. The stock is expected to have 
nd rate is 6.50%. (There are 63 million 

ach other after 1998, estimate the value