Assume you are now at the beginning of the year 2022 and are trying to evaluate company GrowthClassic Incorporated using the discounted cash flow valuation model. The marginal corporate tax rate of GrowthClassic is 25%. Please answer the following questions in the answer book.
a) The credit rating of GrowthClassic is B+ and the average credit spread of debt with B+ credit rating and the same maturity is 2%. The risk-free rate for all the maturity is 3%. The Bloomberg adjusted beta for GrowthClassic at the end of the last year was 1.65. The expected return of the market portfolio is 8.20%. The current debt-to-equity ratio at the end of the last year was 0.5 and then changed to 1.4 at the beginning of this year. We assume that the changes in capital structure does not affect the firm's credit rating nor business risk. Please base on the above information and calculate the cost of debt (Kd), cost of equity (Ke) and the weighted-average cost of capital (WACC) of the firm after the changes of capital structure.
b) GrowthClassic had operating income before interest and taxes for the year 2021 of $600 million. The firm had depreciation and amortization expense of $40 million that same year. Capital spending totaled $120 million during 2021. At the end of 2020 and 2021, working capital totaled $70 and $90 million, respectively. Estimate the free cash flow of the firm in 2021.
c) The free cash cash flow to the firm of GrowthClassic is expected to grow at 8% every year for the next 3 years (2022-2024) and then it is expected to grow at 4% beyond the third year. Using the WACC after the change of capital structure and assuming it will not change in the future, please use the "Perpetuity Growth Method" and estimate the firm's enterprise value at the beginning of the year 2022 (now).
4) From GrowthClassic's financial statements, we know that it currently has $2,200 million total debt outstanding and $600 million cash & cash equivalent. Besides, the firm also has preferred stocks and noncontrolling interest, worth $300 million and $200 million respectively. Based on all the information provided above in this question, calculate the implied total equity value of GrowthClassic's common shares.