Chapter 17

Schwarzentraub Industries' expected free cash flow for the year is $550,000; in the future, free cash flow is expected to grow at a rate of 9%. The company currently has no debt, and its cost of equity is 13%. Its tax rate is 40%. (Hint: Use the equations mentioned below.)

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

Find VU. Enter your answer in millions. For example, an answer of $1.21 million should be entered as 1.21, not 1,210,000. Do not round intermediate calculations. Round your answer to two decimal places. $_________ million

B.1 Find VL if Schwarzentraub uses $7 million in debt with a cost of 7%. Use the APV model that allows for growth. Enter your answer in millions. For example, an answer of $1.21 million should be entered as 1.21, not 1,210,000. Do not round intermediate calculations. Round your answer to two decimal places. $_________ millionB.2 Find rsL. Do not round intermediate calculations. Round your answer to one decimal place.

_________ %

C.1 Based on VU from part a, find VL using the MM model (with taxes) if Schwarzentraub uses $7 million in 7% debt. Enter your answer in millions. For example, an answer of $1.21 million should be entered as 1.21, not 1,210,000. Do not round intermediate calculations. Round your answer to two decimal places. $_________ millionC.2 Find rsL. Do not round intermediate calculations. Round your answer to one decimal place.

_________%

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