Question
1) Consider a firm that produces a yearly level-perpetuity Equity FCF of 1000. Assume that the first cash-flow arrives one year from today. Further assume
1) Consider a firm that produces a yearly level-perpetuity Equity FCF of 1000. Assume that the first cash-flow arrives one year from today. Further assume that the market value of debt is 5000; that the equity discount rate is 10% and the debt discount rate is 5%. The tax rate is 20%. What is the firms WACC?
2) Consider a firm that last year issued 1.1M of debt that is currently trading at 1M with a YTM of 3%. The probability of future default is considered to be very low. The firm also has 2M worth of common stock trading. There are no untraded claims on the firm. We use CAPM to assess the firms required rate of return. The equity beta is 3. The market risk premium is 5%. The risk free rate is 2%. The debt beta is 0.5. The tax rate is 30%. What is the firms WACC?
3) We are constructing a firm today financed by 50% debt and 50% equity. We expect $1,000,000 in sales next year; COGS = 60% of sales; depreciation = $200,000, which is offset by $200,000 in CAPEX. The tax rate is 30%. Next years cash flows are level-perpetuities (they stay the same forever). The WACC is 10%. The first relevant cash flows occur in 1 year. What is the value of the equity as of right now?
4) From question 3, what is the implied required return on equity in the previous question? Assume that all rates of return and all numbers stay constant forever. Assume that the annual interest expense (before taxes) is 50,000.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started