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Been told we do not need market value of debt to work it out. QUESTION 3 Firm A is expected to generate $1.40 million free
Been told we do not need market value of debt to work it out.
QUESTION 3 Firm A is expected to generate $1.40 million free cash flow next year, and thereafter the free cash flow will be maintained at a growth rate g of 4% indefinitely. It has a debt-to-equity ratio of 0.5. The cost of debt before tax shield is 8%. The tax rate is 25%. The firm has a beta of 0.75, the equity market premium is 10%, the risk-free interest rate rf is 4%. The firm has 1.5 million shares outstanding. Required i. What is the cost of equity of A? ii. What is the WACC of A? iii. What is the share price of A? (15 marks) Step by Step Solution
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