Question 1:

•An investor is planning to value company A. After careful estimation of cash flows, he projects the following cash flows for the firm in the following 5 years as.•Year 1: FCFF_1 = $50•Year 2: FCFF_2 = $60•Year 3: FCFF_3 = $70•Year 4: FCFF_4 = $80•Year 5: FCFF_5 = $90

The risk free rate of return is 3%, equity risk premium (market premium) is 6%. Beta is 1.2. For the terminal value, he assumes a perpetual growth rate of 3%. The corporate tax rate is 25%, and equity and debt is in equal proportion in the firm and the cost of debt borrowing is 10%.
Estimate the value of the firm.

 

 

 

Question 2:
 

•XYZ Corporation is projecting its Free Cash Flow to the Firm (FCFF) for the next 5 years. The FCFF projections are as follows:

Year 1: FCFF_1 = $40

Year 2: FCFF_2 = $55

Year 3: FCFF_3 = $70

Year 4: FCFF_4 = $85

Year 5: FCFF_5 = $100

•Other information:

The risk-free rate (rf) is 4%.

Equity risk premium or market premium(ERP) is 7%.

Beta (β) of the company is 1.5.

The corporate tax rate (T) is 30%.

The company's debt carries an interest rate of 8%.

Equity and debt are in equal proportion in the firm.

The terminal growth rate (g) is 4%.

 

Calculate the estimated value of the firm using the DCF model.