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Calculation Of Weighted Average Cost Of Capital And Cash Flows
Question
ICoupon is a publicly listed firm that offers subscribers discount coupons to a wide variety of stores and restaurants in metropolitan areas in the US. The firm recently has struck deals with key retailers for competitive oneday only discounts. ICoupon is entering a fast growth phase, which is expected to last for 5 years. The following table contains income statement information for the most recent year 2013 (all numbers are in $1,000s).
Year 
2013 


Revenues 
2,500 
Operating Costs (incl. Depreciation.) 
1,250 
EBIT 
1,250 
Interest expense 
560 
EBT 
690 
Taxes 
276 
Net Income 
414 
Detailed projections (in $1,000s) for the years 20142018 are given below:
 Expected growth in revenues is 100% per year.
 Operating profit (EBIT) equals 50% of revenues in each of the years 20142018.
 The increase in net working capital equals 20% of revenues in each of the years 20142018.
 Gross investments in fixed assets equal $1,500 in each of the years 20142018.
 The amount of depreciation is equal to $500 in each of the years 20142018.
At the beginning of 2014, ICoupon has 4 million shares outstanding and has a debt ratio of 25% in market value terms. The firm has a BBB bond rating and its equity beta equals 2.86. The interest rate on Tbonds equals 3.5%, the expected yield on BBBrated bonds is 5% and the market risk premium is 5%. Finally, you can assume that all cash flows will be realized at the end of the year and that the firm is subject to a 40% marginal corporate tax rate. With this information answer the following four questions.
(i) Determine the relevant cash flows for a valuation of the firm for the years 20142018 (in $1,000s). Show your calculations.
(ii) Calculate the weighted average cost of capital for ICoupon.
(iii) Determine ICoupon’s business risk (or asset beta). Show all your calculations.
(iv) If we assume that ICoupon immediately lowers its target leverage (D/V) to 10% with no change in bond rating, and will maintain a constant growth rate of 3.5% after 2018, what would ICoupon’s share price be at the beginning of 2014? Show all your calculations.
Summary
The question belongs to Finance and it discusses about calculation of weighted average cost of capital and cash flows.
Total Word Count 294
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