The earnings of Astra and Zen are (–5 year refers to 5 years ago, 0year the dividend due this year, not paid yet, +1year the expected dividend for next year). All the below are in millions.
Year | –5 | –4 | –3 | –2 | –1 | 0 | +1 | +2 |
Astra | –11 | 0 | 1 | 2 | 21 | 22 | 23 | 23 |
Zen | 5 | 13 | 7 | 4 | 15 | 13 | 3 | 10 |
The companies pay almost 100% of their after-tax cash flows to owners. Astra has no debt while Zen has debt with 4% YTM and 50 m market value. The asset (unlevered) β for companies in that type of industry is 0.5. The corporate tax rate is 35%. There are no personal taxes. The risk-free rate is 3% and the market return is 6%.
- What is the WACC, the enterprise value and equity value for both companies? Explain your calculations.
- How would you change the capital structure of both companies?