Your firm has a free cash flow of $300 at year 1, $360 at year 2, and $864 at year 3. After three years, the firm will cease to exist.

Your firm has a free cash flow of $300 at year 1, $360 at year 2, and $864 at year 3. After three years, the firm will cease to exist. As of today (i.e. at year 0), the firm is partially financed with a 1-year maturity debt, whose face value is $660 and interest rate is 10%. After the debt matures at year 1, the firm will not issue any more debt and will remain unlevered. Assume that the firm’s unlevered cost of capital is 20%, and the firm’s cost of debt is identical to the interest rate on the debt (i.e. 10%). The corporate tax rate is 40%.

What is the firm’s enterprise value if the firm were unleveled?

	A.	$1,012
	B.	$1,000
	C.	$1,024
	D.	$1,524

What is the discount rate for the interest tax shield?

A.
Cost of levered equity

B.
WACC

C.
Cost of debt

D.
Cost of unlevered equity

What is the present value of the interest tax shield?

A.
$12

B.
$33

C.
$24

D.
$66

What is the firm’s enterprise value?

A.
$1,000

B.
$1,524

C.
$1,024

D.
$1,012

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Your firm has a free cash flow of $300 at year 1, $360 at year 2, and $864 at year 3.

QUESTION 14 [Q14-17] Your firm has a free cash flow of $300 at year 1, $360 at year 2, and $864 at year 3. After three years, the firm will cease to exist. As of today (i.e. at year 0), the firm is partially financed with a 1-year maturity debt, whose face value is $660 and interest rate is 10%. After the debt matures at year 1, the firm will not issue any more debt and will remain unlevered. Assume...

[Q14-17] Your firm has a free cash flow of $300 at year 1, $360 at year...

[Q14-17] Your firm has a free cash flow of $300 at year 1, $360 at year 2, and $864 at year 3. After three years, the firm will cease to exist. As of today (i.e. at year 0), the firm is partially financed with a 1-year maturity debt, whose face value is $660 and interest rate is 10%. After the debt matures at year 1, the firm will not issue any more debt and will remain unlevered. Assume that the...

Valuing the firm Year 1 2 3 Free cash flow for the next 3 years $2,527,674.14...

Valuing the firm Year 1 2 3 Free cash flow for the next 3 years $2,527,674.14 $2,584,518.99 $2,648,952.93 Weighted average cost of capital, WACC 16% Long-term growth rate of FCFs, g (since year 4) 4% Debt $3,000,000 Number of shares 1,000,000 Initial cash and marketable securities $460,000 Terminal value Enterprise value Total asset value Equity value Equity value per share If the stock is currently traded at $20.50 per share, how would you trade?

Given the following information: Year 1 free cash flow: 40 million Year 2 free cash flow...

Given the following information: Year 1 free cash flow: 40 million Year 2 free cash flow 90 million Year 3 free cash flow 100 million After year 3, expected FCF growth is expected to be 4% The cost of capital is 9% Short term investments is 50 million Debt is currently 25 million Preferred shock is 5 million There are 20 million outstanding stock shares. 1. Calculate the intrinsic stock price . If the current stock price was $100.00, would...

Given the following information: Year 1 Free cash flow: 40 million Year 2 Free cash flow...

Given the following information: Year 1 Free cash flow: 40 million Year 2 Free cash flow 90 m Year 3 Free cash flow 100 m After year 3, expected FCF growth is expected to be 4% The cost of capital is 9% Short term investments = 50 million Debt is currently 25 million Preferred stock = 5 million There are 20 million outstanding stock shares. 1. Calculate the intrinsic stock price. 2. If the current stock price was $100.00, would...

A firm has projected free cash flows of $175,000 for Year 1, $200,000 for Year 2,...

A firm has projected free cash flows of $175,000 for Year 1, $200,000 for Year 2, and 225,000 for Year 3, $250,000 for Year 4, and 300,000 for Year 5. The projected terminal value at the end of Year 5 is $600,000. The firm's Weighted Average cost of Capital (WACC) is 10.5%. Microsoft® Excel® document to determine the Discounted Cash Flow (DCF) value of the firm based on the information provided above. Show calculations.

Covan, Inc. is expected to have the following free cash? flow: Year 1 2 3 4...

Covan, Inc. is expected to have the following free cash? flow: Year 1 2 3 4 FCF 11 13 14 15 Grow by 4 % per year a. Covan has 8 million shares outstanding, $2 million in excess cash, and it has no debt. If its cost of capital is 12 %, what should be its stock price? b. Covan reinvests all its FCF and has no plans to add debt or change its cash holdings (it does not invest...

Covan, Inc. is expected to have the following free cash? flow: Year 1 2 3 4...

Covan, Inc. is expected to have the following free cash? flow: Year 1 2 3 4 FCF 13 15 16 17 Grow by 3 % per year a. Covan has 6 million shares? outstanding, ?$3 million in excess? cash, and it has no debt. If its cost of capital is 10 %?, what should be its stock? price? b. Covan reinvests all its FCF and has no plans to add debt or change its cash holdings? (it does not invest...

Covan, Inc. is expected to have the following free cash flow: Year 1 2 3 4...

Covan, Inc. is expected to have the following free cash flow: Year 1 2 3 4 times times times••• FCF 1010 1212 1313 1414 Grow by 3 %3% per year a. Covan has 88 million shares outstanding, $44 million in excess cash, and it has no debt. If its cost of capital is 11 %11%, what should be its stock price? b. Covan adds its FCF to cash, and has no plans to add debt. If you plan to sell...

Firm free cash flow to grow by 8% over the next 4 yrs, after it will...

Firm free cash flow to grow by 8% over the next 4 yrs, after it will decline to 4% for 3 yrs, then will level off to 2% growth indefinitely. Reported free cash flow $75,000,000. WACC is 16%, what is the value of the firm today? show work 20,000,000 shares of stock, what should the value of the shares in the market (efficient market, no debt)? show work Part (b) suppose there's $200,000,000 of debt. what would be the value...

Subjects

	A.	Cost of levered equity
	B.	WACC
	C.	Cost of debt
	D.	Cost of unlevered equity

	A.	$12
	B.	$33
	C.	$24
	D.	$66