Firm value purely because the interest payments generate

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Reference no: EM131977644

Consider a firm as follows: Assume that the firm has no debt. The cash flows are received at the end of each year and are perpetual. Cost of equity capital for an unlevered firm, r0, is 20%. The first cash-flow will be received one year from today. All calculations for valuation are done today. Firm value is defined as collective value of debt and equity.

Sales = $ 500,000

Cash Costs = 360,000

Operating Income = 140,000

Tax @ 34% -47,600

Unlevered cash flow (UCF) $ 92,400

To illustrate that financing has no impact on firm value if there are no taxes (i.e. financing affects firm value purely because the interest payments generate tax-savings), and to further illustrate the equivalence of various valuation methods.Assume the the firm has$ 100,000 of debt @ 10% and the tax rate is zero.Find the firm value using

i) WACC method$__________.

Reference no: EM131977644

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