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A firm owns three department stores. Each store has a debt-equity ratio of 30 percent and makes interest payments of $44,000 at the end of
A firm owns three department stores. Each store has a debt-equity ratio of 30 percent and makes interest payments of $44,000 at the end of each year. The cost of the firms levered equity is 14.5 percent. Each store estimates that annual sales will be $1.305 million; annual cost of goods sold will be $755,000; and annual general and administrative costs will be $415,000. These cash flows are expected to remain the same forever. The corporate tax rate is 21 percent.
What is the value of the firm? (Hint: Use Flow-to-Equity Approach).
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