Question
Expected to generate free cash flows of $10.9 million per year. Has permanent debt of $40 million A tax rate of 40% Unlevered cost of
Expected to generate free cash flows of $10.9 million per year.
Has permanent debt of $40 million
A tax rate of 40%
Unlevered cost of capital of 10%.
Value of their equity using the APV method:
Value of unlevered firm $ 109,000,000
Present value of tax shield $ 16,000,000
Value of levered firm $ 125,000,000
Value of Equity $ 85,000,000
WACC and equity value using the WACC method:
| WACC | 8.72% |
| Free Cash flow | $ 10,900,000 |
| Value of equity | $ 125,000,000 |
Equity Cost of Capital 5%
Equity Cost of Capital 11.41%
Equity value using FTE method:
FCFE = 9.7 million
Value of equity = $85 million
Why do we use the APV method?
Why do we use the WACC method?
Why do we use the FTE method?
What is each method telling us?
Do we use each method to predict what? Or is to analyze what?
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