Question 1

ETHOS is a chain of fitness boutique that provides its customers with a

non-stop fitness studio ranging from cycling, yoga, hot yoga, barre to
cross-training. ETHOS was established in 2015 and since then has come
a long way to change the fitness industry.

ETHOS strives to provide overworked and time-deprived customers

with a non-stop shop mode. This is delivered alongside a FitLab where
science and health technology are integrated into the ETHOS approach.

You have recently joined ETHOS as their Financial Specialist. Your main
task as Financial Specialist is to figure out how best to represent your
company to the existing shareholders and to the potential shareholders.
Your supervisor is keen regarding the intrinsic value of the firm and has
asked you to provide her with a relevant figure.

Using the information provided in Table 1, you are required to compute

the following:

(a) Given that the clean surplus equation holds, compute the
dividends for the forecasted years (2020-2022)

(b)Compute the intrinsic value of the firm using Dividend Discount

Model, assuming that ETHOS will sell its business for an amount
of its book value at the end of 2022. Cost of equity is 8%
 Table 1: Financial Snapshot of ETHOS

Year 2019 2020 2021 2022

Equity Book Value (opening) £ 1,255,000 £ 2,490,000 £ 6,072,000
Net Income (during the year) £ 70,900 £ 1,735,000 £ 4,332,000 £ 7,431,000
Dividend ? ? ?
Equity Book Value (ending) £ 1,255,000 £ 2,490,000 £ 6,072,000 £ 12,603,000
Question 2

You are provided with the following information regarding Heparin

Ltd.

Long-term debt $500 million

Book value of Preferred Stock $200 million

Book value of Common Stock $300 million

# of outstanding shares 17 million shares outstanding

Market value of Preferred Stock $150 million

Annual Dividend Payment Per $8

Share
Market value of preferred stock per $100
share

Market value of common stock per $50

share

Cost of Debt 6%
Return on Market ( R M ) 10%
Risk-free Return ( R RF) 3%
Beta ( B) 1.2
Tax rate 30%

Required:

1. Compute the WACC and explain in detail why cost of capital

matters for firms when raising external equity?