Firm should be discounted to compute this firms value

Assignment Help Financial Management

Reference no: EM131300449

Consider a firm with year 0 free cash flows (FCF) of $200 million. Assume that these free cash flows are a growing perpetuity, growing at a constant growth rate of 3% per year, forever. Assume that year 0 ended yesterday, and the year 1 free cash flow is exactly one year away. Other information for the firm is as follows: Cost of Debt, RD = 11%; Cost of Equity, RE = 20%; Tax Rate = 35%; and the firm uses 25% debt and 75% equity in its capital structure.

a. What is the appropriate discount rate at which the free cash flows of the firm should be discounted to compute this firm’s value?

b. What is the value of the firm?

Reference no: EM131300449

Questions Cloud

What are the free cash flows to equity to the firm : Consider a firm with the following cash flows as of year 0: The firm’s total year 2 interest expense will be $55 million, while it will be $50 million in all other years. What are the Free Cash Flows to Equity (FCFE) to the firm in years 1, 2, and 3?

Currently re-evaluating your payables policy : You are currently re-evaluating your payables policy. Your current suppliers offer terms of 1.5/10, net 40 with a late payment fee of 1.5% per month. How long should you delay payment given the terms of your current suppliers? Prove your answer by re..

End of credit term period assuming your investment rate : For the following set of terms, state whether you should take the cash discount or pay at the end of the credit term period assuming your investment rate is 10 percent.

Compute the free cash flows to the firm at the end of years : Consider a firm with the following cash flows as of year 0: The Sales of the company is expected to grow at a 12% rate over the next two years, and at a constant rate of 6% annually thereafter. Compute the Free Cash Flows (FCF) to the firm at the end..

Firm should be discounted to compute this firms value : Consider a firm with year 0 free cash flows (FCF) of $200 million. Assume that these free cash flows are a growing perpetuity, growing at a constant growth rate of 3% per year, forever. Assume that year 0 ended yesterday, and the year 1 free cash flo..

What is the compute stock returns : Jan Smith purchased 100 shares of XYZ Corporation for $25 a share and paid a commission of $125. The current price of the stock is $32 per share. Last year, Jan received dividends of $1 per share. What is the compute stock returns?

What is the market value of equity of firm after debt issue : Zack's Inc., an all-equity firm, is subject to a 30% corporate tax rate. Its equityholders require a 20% return. The firm's market value now is $3,500,000, and there are 175,000 shares outstanding. Suppose the firm issues $1 million of bonds at 10% a..

What is the irr of this proposed power plant : The world’s largest carpet maker has just completed a feasibility study of what to do with the 16,000 tons of overruns, rejects, and remnants it produces every year. What is the IRR of this proposed power plant? If the firm’s MARR is 15% per year, s..

Gain is evenly split between the two parties : Company A can borrow yen at 16.0 percent and dollars at 14.6 percent. Company B can borrow yen at 14.6 percent and dollars at 14.133 percent. If A would like to borrow yen and B would like to borrow dollars. The financial intermediary charges a fee o..

User Account

All Pages