AFM Co. has a market value-based D/V ratio of 1/3. The expected return on the company’s...

AFM Co. has a market value-based D/V ratio of 1/3. The expected return on the company’s unlevered equity is 20%, and the pretax cost of debt is 10%. Sales for the company are expected to remain stable indefinitely at $25 million. Costs amount to 60% of sales. The corporate tax rate is 30%, and the company distributes all its earnings as dividends at the end of each year. The company’s debt policy is to maintain a constant market value-based D/V ratio.

(a) If the company were all equity financed, how much would it be worth?

(b) What is the expected rate of return on the firm’s levered equity?

(c) First, use the after-tax WACC approach to calculate the value of the entire company (V). Then compute the value of the company’s equity (E) and the value of the company’s debt (D).

(d) Use the APV approach to compute the value of the company. You will need to use some of the answers from part (c).

Expert Solution

ekkarill92 answered 2 years ago

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