QuestionAssume that the company has a tax rate of 35%, calculate the effective(after-tax) cost of debt capital. 7. Calculate the company’s WACC using the market value of equity and debt (i.e., gross debt not net debt). 8. Calculate the company’s net debt by subtracting its excess cash (collected in step 2) from its debt. Recalculate the weights for the WACC using the market value of equity, net debt, and enterprise value (note: enterprise value is the total market value of a firm’s equity and debt, less the value of its cash and marketable securities). Recalculate the company’s WACC using the weights based on the net debt. How much does it change? 9. How confident are you of your estimates in steps 7 and 8? What implicit assumptions did you make during your data collection efforts? 10. Now using relative valuation, estimate the share price of the companies that you have chosen. Use the four multiples (i.e. EBITDA multiple, P/E ratio, P/S ratio and EBIT multiple). (Hint: You can follow the steps from the example uploaded to Quercus – See Session 8 to 9.) You will have 4 share price estimates per company. Based on what you calculated, what do you believe is the share price? Please briefly justify your conclusion.BusinessFinanceMGT 232
