QUESTION 4

a. You want to start a new construction company. You think that your FCF will be $100,000 in the first year and grow at 4% per year. With 0 debt, you estimate that your cost of equity (unlevered cost of capital) will be 13%. What is the enterprise value of your company?

b. Using the info from Q4 You think that adding some debt to your company can help boost the enterprise value. Assume the corporate tax rate is 15%. First, you consider borrowing $296,852 in debt with a cost of debt of 6%. If you plan to keep debt at this level forever, what is the enterprise value of your company? (Hint: Use APV for this question)

c. Using the info from Q4 You think that adding some debt to your company can help boost the enterprise value. Assume the corporate tax rate is 15%. Next, you consider using a debt-to-equity ratio of 1:2 with a cost of debt of 6%. If you plan to keep the debt to equity ratio constant, what is the enterprise value of your company? (hint: Calculate new cost of equity, then WACC, then EV)