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3. Firm XYZ is currently all equity financed and it has a cost of capital of 12%. Its projected after-tax free cashflows are $10 million
3. Firm XYZ is currently all equity financed and it has a cost of capital of 12%. Its projected after-tax free cashflows are $10 million one year from now, increasing by 25% each year over the following three years. Thereafter its cash flows are estimated to remain constant forever. The risk free rate is 2% and the market risk premium is 7%. The corporate tax rate is 30%. (a) Determine the present value of Firm XYZ. [4 points) (b) Firm XYZ takes on $25 million of debt for three years at an annual interest rate of 5%. It makes all the interest payments when due and repays the principal at maturity. What is the value of Firm XYZ now? [4 points) (c) Suppose that, instead of the debt described in part (b), Firm XYZ took on long-term debt of $25 million on which it paid interest each year, but rolled over the principal forever. What would the value of Firm XYZ be in this case? [4 points)
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