Prokter and Gramble? (PKGR) has historically maintained a? debt-equity ratio of approximately 0.21. Its current stock price is $ 53per? share, with 2.9billion shares outstanding. The firm enjoys very stable demand for its? products, and consequently it has a low equity beta of 0.525 and can borrow at 4.1?%, just 20 basis points over the? risk-free rate of 3.9?%. The expected return of the market is 10.2?%, and? PKGR's tax rate is 30?%.
QUESTIONS:
1) This? year, PKGR is expected to have free cash flows of ?$5.5 billion. What constant expected growth rate of free cash flow is consistent with its current stock? price?
2) PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher? debt-equity ratio of 0.525?, it believes its borrowing costs will rise only slightly to 4.4?%. If PKGR announces that it will raise its? debt-equity ratio to 0.525 through a leveraged? recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.