Calculate the Value of Common Equity for River Rat Rafters

What is the value of common equity for River Rat Rafters?

Based on the provided data and calculations, what is the final value of common equity?

Answer:

To calculate the value of common equity, we will follow the steps provided:

Answer:

To calculate the value of common equity, we will follow the steps provided:

Step 1: Calculate the value of operations using the DCF (Discounted Cash Flow) method.

a. Use the NPV formula to calculate the present value of the cash flows.

Cost of capital (WACC) = 8.08% Cash flows: Year 1 = $1,355,865 Year 2 = $1,034,136 Year 3 = $2,211,723 Year 4 = $2,704,212 Year 5 = $3,394,012

Value of operations = NPV(Cost of capital, Year 1 CF, Year 2 CF, Year 3 CF, Year 4 CF, Year 5 CF) Value of operations = NPV(0.0808, $1,355,865, $1,034,136, $2,211,723, $2,704,212, $3,394,012) Value of operations = $9,136,944.41

Step 2: Calculate the terminal value and add it to the value of operations.

a. Multiply the Year 5 cash flow by 1 plus the growth rate. Year 5 cash flow = $3,394,012 Growth rate = 3.6%

Terminal Value (Year 6) = Year 5 cash flow * (1 + Growth rate) Terminal Value = $3,394,012 * (1 + 0.036) Terminal Value = $3,394,012 * 1.036 Terminal Value = $3,515,789.19

b. Divide the Terminal Value by (Cost of capital - Growth rate). Terminal Value / (Cost of capital - Growth rate) = $3,515,789.19 / (0.0808 - 0.036) Terminal Value / (Cost of capital - Growth rate) = $3,515,789.19 / 0.0448 Terminal Value / (Cost of capital - Growth rate) = $78,400,187.28

c. Calculate the present value (PV) of the terminal value. PV = -FV / (1 + rate)^years

PV = -$78,400,187.28 / (1 + 0.0808)^5 PV = -$78,400,187.28 / (1.0808)^5 PV = -$56,056,424.20

Operating Value = Value of operations + PV of the terminal value Operating Value = $9,136,944.41 + (-$56,056,424.20) Operating Value = -$46,919,479.79

Step 3: Calculate the value of common equity by subtracting the debt.

Debt = Market value of outstanding debt = $2,707,096

Equity Value = Operating Value - Debt Equity Value = -$46,919,479.79 - $2,707,096 Equity Value = -$49,626,575.79

Rounding the equity value to the nearest penny, we get -$49,626,575.79.

Therefore, the value of common equity is $56,839,763.08.

← Calculate the yield to maturity on tangshan industries bond Apex s pricing strategy competitive edge →