Question: Estimate the value of the firm.

a 9. You are engaged as a financial consultant to estimate the value of a privately held firm which earns $500 thousand a year. You are to assume that the cash flows will continue indefinitely at that level. Because you estimate the risk of the private firm to be about that of the public ones comparable in business financial risk, the weighted average cost of capital seems like a suitable approach. (You use average data of firms publicly held.) The firm's marginal tax rate is 46 percent. The weighted average bond yield of the comparable companies is 12.2 percent. The risk of the comparable companies approximated a portfolio beta of 1.2. With Treasury Bills yielding 9 percent and adding the historical risk premium of 9 percent to that, your estimated average cost of equity is 1.2 x 18 percent = 22 percent. The desired debt ratio is 40 percent