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

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.

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.

Expert Solution

jeff jeffy answered 3 years ago

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