Maxis Communications reported earnings before interest and taxes of $850 Million in 2017, with a depreciation allowance of $400 million and capital expenditures of $500 million in that year; the working capital requirements were negligible. The earnings before interest and taxes and net cap ex are expected to grow 20% a year for the next five years. The cost of capital is 10% and the return on capital is expected to be 15% in perpetuity after year 5; the growth rate in perpetuity is 5%.

Duration Debt 1 year $2 billion 2 years $4 billion 5 years $4 billion

The firm has $10 billion in debt outstanding with the following characteristics: The annualized standard deviation in the firms stock price is 35%, while the annualized standard deviation in the traded bonds is 15%. The correlation between stock and bond prices has been 0.5, and the average debt ratio over the past few year has been 60%. The three-year bond rate is 5%, and the tax rate is 40%. a) Estimate the value of the firm using the FCFF approach. b) Estimate the value of the equity using the Black-Scholes Option Pricing Model. c) Estimate the market value of the debt and the appropriate interest rate on the debt.