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Question 1

Use the below information to value the debt in a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now.

Data on a Levered Firm with Perpetual Cash Flows

Item abbreviation	Value	Item full name
FFCF (millions)	$10.6	Firm free cash flow (or Cash Flow from Assets)
g	2% pa	Growth rate of OFCF
rD	3% pa	Cost of debt
rEL	7% pa	Cost of levered equity
D/VL	40% pa	Debt to assets ratio, where the asset value includes tax shields
tc	30%	Corporate tax rate

The current value of debt is

a.187.06

b. 139.47

c. 348.68

d. 145.63

e. 124.71