Question
Your manager wants you to help him value the Firm K and its equity and debt. The risk-freerateis 2%whiletheexpected marketreturn is 5%. Firm K's beta
Your manager wants you to help him value the Firm K and its equity and debt. The risk-freerateis 2%whiletheexpected marketreturn is 5%.
Firm K's beta is 1.5. Firm's K debt to equity is 1:1. Firm's K cost of debt is 2.5% while itscorporate tax rate is 30%. Its free cashflow for equity is $1 million per year. Interest expenseis $50,000 per year with no Net borrowing. Successive cash flows (equity and firm) grow at1%annually.
- UsingCapitalAssetPricingModel(CAPM),calculatethecostofequityfor FirmK.
(4marks)
- CalculatetheWeighted AverageCostofCapital(WACC).
(4marks)
- Howdoesthecorporatetax reducetheoverallWACC?
- Usingfree cashflowvaluationmethods,computevalueofequity,firmanddebt.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
1 Calculating the cost of equity for Firm K using the Capital Asset Pricing Model CAPM The CAPM form...
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Step: 2
Step: 3
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Fundamentals of corporate finance
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates
2nd Edition
978-0470933268, 470933267, 470876441, 978-0470876442
