Accounts solution for value of equity:

Assume that your assignment is to value Delta Oil & Gas Company. Deltas free cash flow (FCF) for the
next 5 years, from 2011 through 2015, are expected toremain constant at $10 million a year. Deltas
growth rate of sales and free cash flow is expected to be 3% starting 2016. Currently, Delta has 20 million
shares of common stock outstanding at a market price of $25 per share. Cost of common equity is 15%. In
addition, Delta has 200,000 bonds outstanding at a market price of $1,250 per bond. After-tax cost of the
bond is $8%. Using this information, what value will you estimate for Delta?

Answer:
Value of equity = 20,000,000 x $25 = 500,000,000
Value of debt = 1,250 x 200,000 = 250,000,000
Total value = $500,000,000 + $250,000,000 = $750,000,000
WACC = we*ke + wd*kd (after-tax)
= (500,000,000/750,000,000)*15% + (250,000,000/750,000,000) (8%)
= 0.66667 x 15% + 0.3333 x 8%
= 12.67%
Horizon value (2016) = FCF (1 + g)/ (WACC g)
= $10 (1.03)/ (0.1267 0.03)
= $106.51
Value = FCF (PVIFA @ 12.67%, 5) + FCF5/1.12676
= $10 (PVIFA @ 12.67%, 5) + 116.81/1.12676
= $35.46 + $57.10
= $92.56 million

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