Natref is looking into the acquisition of Marine Oils. Marine Oils has 1 (one) million shares outstanding and a target capital structure of 30% debt, its beta is 1.4. Marine Oils has R10.82 million in debt trading at par value and pays 8% interest. Marine Oils free cash flow (FCFo) is R2 million per year and it is expected to grow at constant rate of 5% a year. Marine Oils pays 40% corporate tax. The risk free rate of interest is 5% and the market risk premium is 6%. Natref needs to estimate intrinsic value of Marine Oils before making a final decision on this proposed acquisition.
1. What are Marine Oils’ cost of equity and weighted average cost of capital?
2. What is Marine Oils’ intrinsic value of operations?
3. What is the current intrinsic value of Marine Oils’ stock?