What will be the firm''s value in case the loan is repaid

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Reference no: EM131477268

Question: Annie owns a "shell firm"-this is a firm which is incorporated but has no activity whatsoever. Annie's shell firm is about to buy another firm for $900,000. The firm she is purchasing has an annual free cash flow (FCF) of $120,000 each year.

a. Annie's bank is willing to give her a perpetual loan equal to half of the purchase amount at 8% interest. Assuming Annie's firm has no debt and its tax rate is TC = 30%, what will be her firm's value after the purchase:

• In case it will finance the purchase with equity only.

• In case it takes the loan.

b. What will be the firm's value in case the loan is repaid in 20 equal repayments?

Reference no: EM131477268

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