1)    Nick Frost would like to value Automaton, Inc

1)    Nick Frost would like to value Automaton, Inc. using the discounted cash flow (DCF) method.

He forecasts Free Cash Flows (FCFs) of $135 million, $145 million, $146 million, respectively for years 1, 2, and 3. After year 3, he assumes FCFs will increase by 2 percent to perpetuity.

Nick gathers the information below (his "input variables") to compute Automaton's cost of equity, debt, and enterprise value.

Cost of Equity

Risk-Free-Rate = 3 percent

Beta = 1.03

Return of Market Portfolio (S&P 500) = 7 percent

Debt Financing 

Debt to Equity Ratio = 45 percent

Market Value of Zero-Coupon Bonds = $100 million or 75 percent of par value

Maturity of Zero-Coupon Bonds = 15 years

Tax Rate = 35%

Based on Nick's input variables, what fraction of Automaton's assets are equity financed (i.e. Equity-to-Total capitalization ratio)?

A.

45%

B.

55%

C.

40%

D.

69%

Using the Gordon Growth Model, what is Automaton's Terminal Value? Assume a perpetual growth rate, "g," of 2 percent and WACC of 8.9 percent, and use Nick's FCF forecasts.

A.

$1673

B.

$1641

C.

$2116

D.

$2158

 What is Automaton's Enterprise Value? Assume a WACC of 8.9% and constant growth rate of 2 percent to perpetuity and Nick's FCF forecasts.

A.

$2030

B.

$359

C.

$2584

D.

$1998

Based on Nick's input variables, what is Automaton's after-tax cost of debt?.

A.

0%

B.

-1.23%

C.

1.26%

D.

1.90%

Based on Nick's input variables, what is Automaton's Cost of Equity using CAPM?

A.

4.1%

B.

10%

C.

10.2%

D.

7.1%