Compressed Adjusted Present Value Schwarzentraub Corporation's expected free cash flow for the year is $400,000 in the future, free cash flow is expected to grow at a rate of 10 The company currently has no debt, and its cost of equity is 14 Its tax rate is 25 Suppose the firm issues $5 million debt at a rate of 8 Use the compressed adjusted value approach to answer the following questions Do not round intermediate calculations Find V U Enter your answer in millions For example, an answer of $10,550,000 should be entered as 10 55 Round your answer to two decimal places $ million Find V L Use the APV model that allows for growth Enter your answer in millions For example, an answer of $10,550,000 should be entered as 10 55 Round your answer to two decimal places $ million Find r sL Use the APV model that allows for growth Round your answer to one decimal place Start with the value of the unlevered firm, V U from part a Use the MM model (with taxes but with zero growth) to calculate V L ( Hint This answer will differ from that in part b due to differences in growth assumptions ) Enter your answer in millions For example, an answer of $10,550,000 should be entered as 10 55 Round your answer to two decimal places $ million Start with the value of the unlevered firm, V U from part a Use the MM model (with taxes but with zero growth) to calculate r sL ( Hint This answer will differ from that in part b due to differences in growth assumptions ) Round your answer to one decimal place

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 27, 2024

Compressed Adjusted Present Value Schwarzentraub Corporation's expected free cash flow for the year is $400,000; in the future, free cash flow is expected to grow

Compressed Adjusted Present Value

Schwarzentraub Corporation's expected free cash flow for the year is $400,000; in the future, free cash flow is expected to grow at a rate of 10%. The company currently has no debt, and its cost of equity is 14%. Its tax rate is 25%. Suppose the firm issues $5 million debt at a rate of 8%. Use the compressed adjusted value approach to answer the following questions. Do not round intermediate calculations.

Find V_U. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

$ million
Find V_L. Use the APV model that allows for growth. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

$ million

Find r_sL. Use the APV model that allows for growth. Round your answer to one decimal place.

%
Start with the value of the unlevered firm, V_U from part a. Use the MM model (with taxes but with zero growth) to calculate V_L. (Hint: This answer will differ from that in part b due to differences in growth assumptions.) Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

$ million

Start with the value of the unlevered firm, V_U from part a. Use the MM model (with taxes but with zero growth) to calculate r_sL. (Hint: This answer will differ from that in part b due to differences in growth assumptions.) Round your answer to one decimal place.

%