Question
Amarindo, Inc. (AMR), is a newly public firm with 10 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free
Amarindo, Inc. (AMR), is a newly public firm with 10 million shares outstanding. You are doing a valuation analysis of AMR. You estimate its free cash flow (FCF) in the coming year to be $20 million, and you expect the firms free cash flows to stay at this level in perpetuity. Because the firm has only been listed on the stock exchange for a short time, you do not have an accurate assessment of AMRs equity beta. However, you do have beta data for UAL, another firm in the same industry:
| Equity Beta | Debt Beta | Debt-Equity Ratio | |
| UAL | 1.5 | 0.30 | 1 |
AMR has a much lower debt-equity ratio of 0.50, which is expected to remain stable, and its debt is risk free. AMRs corporate tax rate is 40%, the risk-free rate is 5%, and the expected return on the market portfolio is 11%. Estimate value of the AMRs interest tax shields.
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Introduction to Managerial Accounting
Authors: Peter Brewer, Ray Garrison, Eric Noreen
7th edition
978-1259675539, 125967553X, 978-1259594168, 1259594165, 78025796, 978-0078025792
