Question

A zero-growth firm faces the following situation, where all cash flows are perpetuities. sales revenue = $8,000,000 operating costs (fixed plus variable) = $6,000,000 • Debt = $3,000,000 • tax rate = 40% rD = 8% • rS = 14% First find the value of the firm "indirectly". Then, confirm that the same result is obtained when the value of the firm is found “directly”.

Answer 1

ANSWER:

Sales Revenue is $8,000,000

Total operating Cost $6,000,000

Debt $3,000,000

Tax ratw is 40%

Cost of Debt (r_d) is 8%

Cost of Retaianed earing (r_s) is 14%

Salels revenues	$8,000,000
Less:Operating Cost	-$6,000,000
Gross Revenue	$2,000,000
Less Internet amount ($3,000,000 * 0.08)	-$240,000
Earning Befoire Tax (EBT)	$1,760,000
Less: Taz(40%)	-$704,000
Net income	$1,056,000

Calculate the value of firm "indirectly"

Firm value = $1,056,000 / 0.14 + $3,000,000

= $10,542,857.1

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