You have been asked to value one of the biggest global companies, Malicaca, Inc., but using only the information provided to you (modified to camouflage the real identity of the company). Malicaca, Inc. is expected to have revenues of $500 million next year (t = 1) that are expected to grow at 8% per year thereafter for the foreseeable future. The data presented to you shows that COGS and SGA are expected to remain at 50% and 10% of revenues for the foreseeable future. For simplicity, you are also asked to make the following assumptions: (a) depreciation is 15% of revenues; (b) it is safe to assume that capital expenditures will be approximately equal to depreciation; and, (c) Malicaca, Inc. will be able to manage with no changes in working capital. You are also provided some detailed information about the Malicaca, Inc.’s main competitors and some market data. The business competitors have an average beta of equity of 2.50, and an average debt/equity ratio of 35% with an average beta of debt of 0.25. The risk free rate is 2.50% and the expected market risk premium (the difference between the market return and the risk free rate) is 4.00% for the foreseeable future. The tax rate is 34%. Assume that the interest payments on debt are tax deductible and for the industry/comparables the tax shield on debt is as risky as the assets of a business.
1. What is the average return on equity in Malicaca, Inc.’s industry?
2. The average return on debt in Malicaca, Inc.’s industry is
3. What is the average return on assets in Malicaca, Inc.’s industry?