Besto Company has a current market value balance sheet and income statement for the most recent period as below. If Besto pays out all of its earnings in dividends to shareholders (implies no growth in earnings) then we can assume that the firm will be able to produce the same level of income and cash flow per year into the indefinite future. Besto spends an amount equal to the depreciation expense per year on fixed assets. In addition, we expect there to be no need for additional working capital into the indefinite future. Besto can borrow at a 10% rate and pays taxes at a 40% rate.

Mkt Value Balance Sheet

Current Assets 1000

Debt 1500

Fixed Assets 1000

Equity 500

Total Assets 2000

Ttl L &E 2000

Income Statement

Revenue 3000

Cash Exp 2000

Deprec Exp 700

EBIT 300

Int Expense 150

EBT 150

Tax 60

NI 90

a) What is the Unlevered Cash Flow (UCF) for Besto?

b) What is the Levered Cash Flow (LCF) for Besto?

c) Using the Flow to Equity Approach (FTE) show what the Levered Cost of Equity is for Besto. You can use the market value of the equity provided in the balance sheet above for this calculation.

d) What is the Unlevered Cost of Equity for Besto?

e) Using the APV approach, show that the value of the entire firm (Besto) is 2,000.

f) What is the WACC for Besto?

g) Using the WACC method, show that the value of the entire firm (Besto) is 2,000.