Your company has expected free cash flows of $65M per year in perpetuity starting next year. Your companys asset cost of capital is 10%. The corporate tax rate is 35%. Ignore other frictions.

For (a), assume that your firm is an all-equity firm.

a) What is the unlevered value of your firm?

For the remaining questions, assume that your firm is a levered firm. Your firm maintains a target leverage ratio (D/D+E). of 40%. The debt cost of capital is 7.5%.

b) What is your companys equity cost of capital ? Use the pretax WACC (weighted average cost of capital) equation to solve for E(re).

c) Calculate your company s WACC with taxes. Round the number to four decimal places.

d) Using WACC, calculate the levered value of your company.

e) What is the NPV of debt financing?