Question
Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in
Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in on year from now, so a perpetuity can be used to value this firm. Both the operating free cash flow (OFCF) and firm free cash flow (FFCF) are constant (but not equal to each other). Data on a Levered Firm with Perpetual Cash Flows Item Abbreviation Value Operating Free Cash Flow OFCF $216m Firm free cash flow (or cash flow from assets levered) FFCF $225m Growth rate of cash flow from assets, levered and unlevered g 5% Weighted average cost of capital before tax WACCBeforeTax 20% Weighted average cost of capital after tax WACCAfterTax 19.4% Cost of debt rD 10% Cost of levered equity rEL 22.5% Debt to assets ratio, where the asset value includes tax shields D/VL 20% Number of shares n 100m Corporate tax rate tc 30% What is the firms current share price? Select one: a. $15.6 b. $12.625 c. $12.6 d. $12.6 e. $11.4
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