Enterprise value including market cap and debt or both

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Reference no: EM131303643

Which method shold I use, DCF method, a fomula for enterprise value including market cap and debt, or both? Please briefly explain the method you use and solve for the question below.

Union Pacific Railroad reported net income of $770 million in 1993, after interest expenses of $320 million. (The corporate tax rate was 36%.) It reported depreciation of $960 million in that year, and capital spending was $1.2 billion. The firm also had $4 billion in debt outstanding on the books, rated AA (carrying a yield to maturity of 8%), trading at par (up from $3.8 billion at the end of 1992). The beta of the stock is 1.05 and the risk premium for equity is 5.5%. There were 200 million shares outstanding (trading at $60 per share), with a book value of $5 billion. Union Pacific paid 40% of its earnings as dividends and working capital requirements are negligible. (The treasury bond rate is 7%.)

Estimate the value of the firm at the end of 1993 by assuming that Union has constant growth rate and its reinvestment rate is expected to be 60%.

Reference no: EM131303643

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