Reference no: EM131188237
A company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30 percent debt.
Assume that firms U and L are in the same risk class, and that both have EBIT = $500,000. Firm U uses no debt financing, and its cost of equity is rsU = 14%. Firm L has $1 million of debt outstanding at a cost of rd = 8%. There are no taxes. Assume that the MM assumptions hold.
1. Suppose that Firms U and L are growing at a constant rate of 7% and that the investment in net operating assets required to support this growth is 10% of EBIT. Use the compressed adjusted present value (APV) model to estimate the value of U and L. Also estimate the levered cost of equity and the weighted average cost of capital.
2. Suppose the expected free cash flow for Year 1 is $250,000 but it is expected to grow unevenly over the next 3 years: FCF2 = $290,000 and FCF3 = $320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is $80,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be $95,000, at Year 3 it will be $120,000 and it will grow at 7% thereafter. The tax rate and unlevered cost of equity remain at 40% and 14%, respectively.
What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)?
What is the current unlevered value of operations?
What is the horizon value of the tax shield at Year 3?
What is the current value of the tax shield?
What is the current total value?
Please show work/formulas
|
Order for the account to reduce to balance
: You are going to withdraw $1000 at the end of each month for the next five years from a bank account that pays interest at a rate of 6% (APR) compounded monthly. How much must there be in the account today in order for the account to reduce to a bala..
|
|
When independent projects are evaluated
: Project A cash flow: -30, 5, 10, 15, 20. Project B cash flow: -30, 20, 10, 8, 6. WACC is 12 percent. 1) Calculate the projects' NPVs, IRRs, MIRRs, regular paybacks, discounted paybacks. 2) How might conflicts exist between the NPV and the IRR when in..
|
|
Shareholders require to be compensated for financial risk
: Ethier Enterprise has an unlevered beta of 1.0. Ethier is financed with 50% debt and has a levered beta of 1.6. If the risk-free rate is 5.5% and the market risk premium is 6%, how much is the additional premium that Ethier’s shareholders require to ..
|
|
Use the AFN equation to forecast additional funds
: Broussard Skateboard's sales are expected to increase by 15% from $8 million in 2013 to $9.2 million in 2014. Its assets totaled $5 million at the end of 2013. Broussard is already at full capacity, so its assets must grow at the same rate as project..
|
|
What is the current unlevered value of operations
: A company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30 percent debt. Suppose the expected free cash flow for Year 1 is $250..
|
|
Use short-term debt to finance its temporary working capital
: A company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30% debt. Find v, s, rs, and WACC for firms U and L.
|
|
What types of risks should shareholder wealth
: What types of risks should shareholder wealth-maximizing managers seek to offset in a firm they are managing? Why? How can patents, copyrights, and legal challenges be used to manage business risk?
|
|
Determine the present value of the stream
: An owner can lease her building for $120,000 per year for three years. The explicit cost of maintaining the building is $40,000, and the implicit cost is $55,000. All revenues are received, and costs borne, at the end of each year. If the interest ra..
|
|
Bz380 management information systems
: Discuss telecommunication operations and three (3) security measures to ensure protection of information. List and describe the organizational, management, and technology dimensions of information systems.
|