In year 1, AMC will earn $1,700 before interest and taxes. The market expects these earnings to grow at a rate of 2.9% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 25%. Right now, the firm has $4,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.9% per year. Suppose the risk-free rate equals 4.8333%, and the expected return on the market equals 10.633%. The asset beta for this industry is 1.68.

f. Using the WACC, what is the expected return for AMC equity?

g. Show that the following holds for AMC:

A=ED+EE+DD+ED.

h. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow? Use that information plus your answer to part (f) to derive the market value of equity using the FTE method.