Question
You are investigating an analyst's valuation done on a large mining firm. The firm's expected FCFF in the next year is $30 million and is
You are investigating an analyst's valuation done on a large mining firm. The firm's expected FCFF in the next year is $30 million and is expected to grow at 5% every year, and the analyst estimates the firm's value to be $800 million. Nonetheless, the analyst made the mistake of using book values of debt and equity in his calculations. Even though the book value weights are unknown, you know that the firm has a cost of equity of 12% and a pre-tax cost of debt of 8%. You also have information that the market value of equity is 4 times the book value of equity, and that the market value of debt is equal to the book value of debt. The tax rate applicable to the firm is 20%. Estimate the most appropriate value of the firm.
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