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[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 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%.

1. What is the firm’s enterprise value if the firm were unlevered?

A. $1,524
B.

$1,012
C.

$1,000
D.

$1,024

2. What is the discount rate for the interest tax shield?

A.

Cost of unlevered equity
B.

WACC
C.

Cost of debt
D.

Cost of levered equity

3. What is the present value of the interest tax shield?

A.

$24
B.

$12
C.

$33
D.

$66

4. What is the firm’s enterprise value?

A.

$1,524
B.

$1,024
C.

$1,000
D.

$1,012

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Please dont forget to upvote

jeff jeffy answered 1 year ago
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