Your firm is expected to generate free cash flows (FCFs) of $160 million annually in perpetuity. The first FCF will occur one year from today. The corporate tax rate is 20%. The comparable firm for you company, called A-Co. has a total market value of $600 million. A-Co. has expected FCFs of $36M per year, forever. A-Co. is an all-equity company.

a. Assume your company will never take on any debt. What is the value of your company?

b. Now assume that you will keep a constant interest coverage ratio. Because of this, your company will have $640M in debt today (time 0). The cost of debt for your company is 3%. What is the value of your company if you keep a constant interest coverage ratio?