please see attached question

Problem 5: CASH FLOWS AND COST OF CAPITAL FOR IN-CHARGE

In-Charge is a publicly listed firm that provides technology allowing customers to monitor their credit and debit card use, set spending limits and activate and de-activate cards through apps on mobile devices. The company recently struck deals with key payment processing companies to adopt this technology in order to prevent fraud. In-Charge is entering a fast growth phase, which is expected to last for 5 years. The following table contains reported income statement information for the recent year 2018 (all numbers are in $1,000s):

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Year 2018

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Revenues 4,500

Operating Costs (incl. Depreciation.) 2,250

EBIT 2,250

Interest expense 2,025

EBT 225 Taxes 90 Net Income 135

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Detailed projections (in $1,000s) for the years 2019-2023 are given below:

• Expected growth in revenues is 100% per year.

• Operating profit (EBIT) equals 50% of revenues in each of the years 2019-2023.

• The increase in net working capital equals 25% of revenues in each of the years 2019-2023.

• Gross investments in fixed assets equal $1,200 in each of the years 2019-2023.

• The amount of depreciation is equal to $700 in each of the years 2019-2023.

In-Charge currently has 2 million shares outstanding and has a debt ratio (D/V) of 50% in market value terms. The firm has a BBB bond rating and its equity beta equals 1.90. The interest rate on T-bonds equals 2.5%, the expected yield on BBB-rated bonds is 4% and the market risk premium is 5%. Finally, you can assume that all cash flows will be realized at the end of the year and that the firm is subject to a 40% marginal corporate tax rate. With this information answer the following four questions.

1. Determine the relevant Free Cash Flows for a valuation of the firm for the years 2019-2023 (in $1,000s). Show your calculations.

1. Calculate the weighted average cost of capital for In-Charge. Show all your calculations.

1. Determine In-Charge’s business risk (or asset beta). Show all your calculations.

1. Now suppose that In-Charge wants to immediately change its leverage to 25% with a corresponding cost of debt of 3%. If we assume that In-Charge maintains a constant growth rate of 2% after 2023, what is In-Charge’s share price?