TEST JUST 5 NOW
livermore
UniversalTechnologiesInc..docxRunning head: UNIVERSAL TECHNOLOGIES, INC. 1
UNIVERSAL TECHNOLOGIES, INC. 5
Universal Technologies, Inc.:
Students Name:
Institutional Affiliation:
Professors Name:
Date:
Universal Technologies have a positive free cash flow which shows that the projected company produce from its operation less the company’s expenditure on asset would be positive. This helps in attracting more investors as its shows that the company is profitable. This in a way attracts Bigalow as this level of cash flow shows that the company is able to paying their dividends and this is a good starting stability for the future dividend payments (Frank, et al. 2016).
1.2 billion of 1000 par value bonds
Free cash flow= operating cash flow- Capital expenditures
Capital expenditure= Net increase in PP&E+ depreciation expense
2018= (3235-2225) + 359
=414- 1369
=$955
Using the stability trend in measuring the amount of risk that Universal Technologies faces shows that the company’s projected Future cash flow would increase as this depicts a higher likelihood of the a positive price performance. Universal Technologies Inc. has a diverging trend as there is a higher investment in the property, plant and equipment’s which would help the business to grow as from the balance sheet the rate increases from $2225 in 2018 to $3235 in 2023 which is a positive increment of $1010. This is the reason behind the increased net income in the company (Frank, et al. 2016).
Return on portfolio=13%
Wx+ Wy+ Wrf= 13%
0.31 wx+ 0.20 wy+ (1-wx-wy)0.07=0.13
0.31Wx+0.20Wy+ (1-wx-wy)0.07= 0.13…..(1)
Portfolio B=0.7: beta of risk free asset=0
1.8wx+1.3Wy+(1-Wx-Wy)0=0.7
1.8Wx+1.3Wy=0.70………(2)
Solving equation (1) and (2)
Multiply equation (1) with 1.3 and equation (2) with 0.2
0.403Wx+0.26Wy+ 0.091( 1-Wx.Wy)=0.169
0.36Wx+ 0.26Wy =0.14
WACC Formula = (E/V * Ke) + (D/V) * Kd * (1 – Tax rate)
E = Market Value of Equity.
V = Total market value of equity & debt.
Ke = Cost of Equity.
D = Market Value of Debt.
Kd = Cost of Debt.
Tax Rate = Corporate Tax Rate
Cost of equity = Risk free rate of return + Beta × (market rate of return – risk free rate of return)
= 1.50+ 1.2(11.25-1.50)
=13.2
Cost of debt= interest expense*(1-tax rate)
=1.2* (1-5.75%)
=1.131b
WACC= 13.2*1.50+ 1.131*5.75
=19.8+6.50325
=26.30325
The weighted average of capital is the average after tax cost of Universal technologies various sources of capital which includes the bonds, common stock and preferred stock. This shows the total cost of capital that is applied by the company to help in running its operation. This holds a justifying benefits for the utility of the stakeholders
From the calculation, the company has a higher weighted average cost of capital which shows that the company has a higher risk which have been associated with the operation of the firm. Which shows that Bigalow General Corporation would need an additional return in neutralizing this risk. This for instance would be an advantage to Universal Technologies and therefore they need to decline the offer and sell their common stock for the price of 20.00 per share (Frank, et al. 2016).
Stock valuation= expected dividend per share/(cost of capital equity-dividend growth rate)
=92.50/13.2-4)
=10.05
The stock valuation of the company is also higher which depicts that the universal technologies Inc. trades at a lower price relative to the company’s projected dividends, earning. Which is very appealing to the Bigalow General Corporation. This shows that the projected value of the sales is more as compared to the sales Mari, 2018).
Using the corporate valuation model, the formulae
= cash flow*(1 + your current growth rate)/ cost of capital- the growth rate.
= 955*(1+0.04)/11.25-0.04)
=$85.53
From the valuation of the company common stock, it’s projected that the price per share would increase to $85.53 per share which means that offering Bigalow General Corporation with 20.00 per share would be cheaper. Hence Universal technologies should decline the offer (Mari, 2019).
References
Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), 300-315.
Mari, C., & Marra, M. (2018). Valuing Firms Under Default Risk and Bankruptcy Costs: A WACC-Based Approach. International Journal of Business, 23(2), 111-130.
