Problem:
Private equity investors are planning to provide financing to Jones Machinery and has approached your firm to perform a valuation assessment of Jones. Jones Machinery has 3 million shares outstanding and a target capital structure consisting of 30 percent debt. The debt interest rate is 8 percent. Assume that the risk-free rate of interest is 3 percent and the return on the market is 9 percent. Jones' historical free cash flow has averaged $4 million per year and is expected to grow at a constant rate of 5 percent a year; its beta is 1.2. Jones has $6 million in debt. The tax rate of Jones Machinery is 18 percent.
Required:
Question 1: Calculate the required rate of return on equity using CAPM for Jones?
Question 2: Calculate weighted average cost of capital of Jones?
Question 3: Calculate the value of operations of Jones?
Question 4: Calculate the value of the Jones' equity?
Note: Please explain comprehensively and give step by step solution.