Question
Facebook Co. has expected FCFs of $40M per year, expected to continue forever. The first cash flow will occur one year from today. The firm
Facebook Co. has expected FCFs of $40M per year, expected to continue forever. The first cash flow will occur one year from today. The firm has committed to a capital structure where they pay a fixed percentage of FCFs out as interest payments to debt holders. As a result, the firms D/E ratio will stay constant throughout the life of the project. The firms unlevered cost of capital is 12%, and its cost of debt is 5%. The corporate tax rate is 50%. Youve been asked to value the company, and have concluded that the firms WACC is 10%. 1. What is the value of the firms debt tax shield? 2. What is the firms debt-equity ratio? 3. What percentage of the FCFs has the firm decided to pay out to debt holders?
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