7. Netsoft is a company that manufactures networking software. In the current year, the firm reported operating earnings before interest and taxes of $200 million (operating earnings does not include interest income), and these earnings are expected grow at 4% a year in perpetuity. In addition, the firm has a cash balance $250 million on which it earned interest income of $15 million. The unlevered beta for other networking software firms is 1.20, and these firms have, on average, cash balances of 10% of firm value. If Netsoft has a debt (to value) ratio of 15%, a tax rate of 40%, and a cost of debt of 10%, estimate the value of the firm. (The risk free rate is 6% and you can assume a market risk premium of 5.5%). ANSWER QUESTION 7 Value of the Firm= Value of OA + Value of Cash FCFF = $120 mln BU_OA = 1.33 Unlevered beta (of other networking firms) corrected for cash=1.33 Levered Beta for Netsoft's operating assets=1.47 Cost of Equity for Netsoft: 14.09% WACC = Cost of Capital for Netsoft = 12.88% Value of Operating Assets = $1,405.40 million Value of Cash (cash earns here the risk free rate)= $250 mln Value of Firm = $1,405.4 mln + $250 = $1,655.40 mln