posted by Duffy on .
I need help with this problem:
1. Hanster Inc. is a levered firm with publicly traded shares. The company has 250 million shares outstanding with a share price of $16 and an estimated equity beta of 1.50. The company has market value based outstanding debt of about $400 million in its capital structure. It plans to continuously refinance the debt and keep it at the same level. That is, it will not change its capital structure going forward. The market cost of the debt is 5% and this is expected to stay so long as the firm maintains its target capital structure. Given the portfolio of assets currently managed by the firm, a stream of perpetual EBIT in the amount of $953.3333 million per annum is expected. The corporate income tax rate (Tc) is 40 percent. Risk free rate is 2% and the expected return on the market portfolio is 10%. It is easy to see that the value of Hanster Inc. is $4,400 million which is the sum of debt and equity, both in market values. Using this as your guideline, please verify that Hanster Inc is indeed worth $4,400 million using both the APV method and the WACC method.