Question

In: Finance

Flow To Equity (FTE) Valuation Consider a project of the Pearson Company (as in an example...

  1. Flow To Equity (FTE) Valuation

Consider a project of the Pearson Company (as in an example from Lecture 3 slides). The timing and size of the incremental after-tax cash flows for an equity-financed project are:

Year

0

1

2

3

4                             

CF

-1,000

325

250

375

500

The firm is financing the project with $600 debt which carries 8% interest rate. The firm currently has no leverage, faces 40% tax rate and has 10% cost of capital. Value the project using flow to Equity Valuation

Hint: estimate the cost of equity using this formula:

Re=Ru+BE1-TRu-RB

In the above, Ru is the unlevered cost of capital, which is 10% in this case; RB is the cost of debt, and T is tax rate. B is the value of debt, and E is the market value of equity.

  1. Flow To Equity (FTE) Valuation

Consider a project of the Pearson Company (as in an example from Lecture 3 slides). The timing and size of the incremental after-tax cash flows for an equity-financed project are:

Year

0

1

2

3

4                             

CF

-1,000

325

250

375

500

The firm is financing the project with $600 debt which carries 8% interest rate. The firm currently has no leverage, faces 40% tax rate and has 10% cost of capital. Value the project using flow to Equity Valuation

Hint: estimate the cost of equity using this formula:

Re=Ru+BE1-TRu-RB

In the above, Ru is the unlevered cost of capital, which is 10% in this case; RB is the cost of debt, and T is tax rate. B is the value of debt, and E is the market value of equity.

Solutions

Expert Solution


Related Solutions

Consider a project of the Pearson Company (as in an example from Lecture 3 slides). The...
Consider a project of the Pearson Company (as in an example from Lecture 3 slides). The timing and size of the incremental after-tax cash flows for an equity-financed project are: Year 0 1 2 3 4                              CF -1,000 325 250 375 500 The firm is financing the project with $600 debt which carries 8% interest rate. The firm currently has no leverage, faces 40% tax rate and has 10% cost of capital. Value the project using flow to Equity...
Distinguish between the following discounted cash Flow valuation models 1) Free Cash flow to equity and...
Distinguish between the following discounted cash Flow valuation models 1) Free Cash flow to equity and 2 Free Cash flow to the firm
Link equity valuation to discounted cash flow models. In theory, is it similar, different? Link the...
Link equity valuation to discounted cash flow models. In theory, is it similar, different? Link the Price/Earnings Ratio to Growth Opportunities, using today’s S&P500 Index as an example. How are FCFF and FCFE defined? What does “consistency” refer to in valuation theory? Please write out answers in detail so I can understand
Critique relative valuation as an equity valuation tool?
Critique relative valuation as an equity valuation tool?
12. 3: Basic Stock Valuation: Free Cash Flow Valuation Model Basic Stock Valuation: Free Cash Flow...
12. 3: Basic Stock Valuation: Free Cash Flow Valuation Model Basic Stock Valuation: Free Cash Flow Valuation Model The recognition that dividends are dependent on earnings, so a reliable dividend forecast is based on an underlying forecast of the firm's future sales, costs and capital requirements, has led to an alternative stock valuation approach, known as the free cash flow valuation model. The market value of a firm is equal to the present value of its expected future free cash...
Consider the following cash flow for an apartment development project:
Consider the following cash flow for an apartment development project: Year     Cash Flow 0          $(522,720) 1          $(441,716) 2          $74,260 3          $83,684 4          $93,391 5          $1,983,228 What is the IRR? What is the total profit? What is the Net Present Value (NPV) if the discount rate is 10%?  
Consider the following alternatives for a Beta company investment project: Net cash flow n Proyect A...
Consider the following alternatives for a Beta company investment project: Net cash flow n Proyect A Proyect B 0 -10,000 -20,000 1 5,500 0 2 5,500 0 3 5,500 40,000 IRR 30% ? PW(15%) ? 6,300 The company's MARR for this type of project is 15%. (a) Determine the IRR of project B. (b) Calculate the PW of project A. (c) Suppose alternatives A and B are mutually exclusive, determine which of them is more attractive using the rate of...
Consider the following two mutually exclusive projects: Year Cash Flow (Project I) Cash Flow (Project II)...
Consider the following two mutually exclusive projects: Year Cash Flow (Project I) Cash Flow (Project II) 0 -$12,300 -$44,000 1 $1,800 $14,000 2 $6,000 $30,000 3 $2,000 $5,000 4 $5,000 $10,000 5 $7,000 $5,000 The required return is 10% for both projects. Assume that the internal rate of return (IRR) of Project I and Project II is 18% and 15%, respectively. a) Which project will you choose if you apply the NPV criterion? Why? b) Which project will you choose...
Free cash flow valuation is one of the best methods to value a growing                  ______ company The...
Free cash flow valuation is one of the best methods to value a growing                  ______ company The time value of money requires that we compare amounts within                       ______               the same timeframe The value of a good in the finance world is the price you originally paid for it         ______ In a bankruptcy, bond holders get paid before equity holders                                 ______ The nominal interest rate = the real interest rate plus inflation                               ______ A partnership is a type of firm which is subject to double taxation                          ______...
Two of the dividend valuation models used in equity valuation are the zero growth model and...
Two of the dividend valuation models used in equity valuation are the zero growth model and the constant growth model. If you were trying to decide which model is best suited to use in valuing a particular company's common stock, what deciding factors would you take into account when trying to choose between the zero growth model and the constant growth model? When comparing the use of these two models, how would each impact the price you would be willing...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT