Question

Suppose that Ret is considering the acquisition of another firm in its industry for $100 million. The acquisition is expected to increase Ret’s free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 3% every year thereafter. Ret currently maintains a debt to equity ratio of 1, its corporate tax rate is 21%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Ret will maintain a constant debt-equity ratio for the acquisition. The Free Cash Flow-to-Equity (FCFE) for the acquisition in year 1 is closest to _______. •

A. $6.5 million • B. $6.8 million • C. $4.1 million • D. $8.3 million

Answer #1

**I have answered the question below**

**Please up vote for the same and thanks!!!**

**Do reach out in the comments for any
queries**

**Answer:**

FCFE = CFO - Capex + New debt issued = -50M

As the company expects to maintain a growth rate of 3% yearly. and debt equity ratio has to be kept constant hence debt should be increased by 3% i.e. $50M * 3% = $1.5M

Interest of existing Debt = $50M * 6% = $3M

Interest after Tax = $3M * (1-21%) = $2.37M

CAsh from operating activity = $5M -$2.37M = $2.63M

FCFE = Cash from operating activites**($2.63M)** -
Capital expenditure(0) + New debt issued($1.5M)

FCFE = $4.1M

Hence **option
C**

Suppose that Rose Industries is considering the acquisition of
another firm in its industry for $100 million. The acquisition is
expected to increase Rose's free cash flow by $5 million the firs
year, and this contribution is expected to grow at a rate of 3%
every year there after. Rose currently maintains a debt to equity
ratio of 1, its marginal tax rate is 40%, its cost of debt rD is
6%, and its cost of equity rE is 10%....

Use the information for the question(s) below. Flagstaff
Enterprises is expected to have free cash flow in the coming year
of $8 million, and this free cash flow is expected to grow at a
rate of 3% per year thereafter. Flagstaff has an equity cost of
capital of 13%, a debt cost of capital of 7%, and it is in the 35%
corporate tax bracket. If Flagstaff currently maintains a .5 debt
to equity ratio, then the value of Flagstaff...

Peter Corperations expects to have free cash flow in the coming
year (FCF1) of $1.75 million, and its FCF is expected to grow at a
rate of 3.5% per year thereafter. Peter Coperations has a cost of
equity of 12% and a cost of debt of 7%, and it pays a corporate tax
rate of 40%. If Peter Coperations maintains a D/E ratio of 2.5,
what is the value of its interest tax shield?

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt-equity ratio of .40, but the industry target debt-equity ratio
is .45. The industry average beta is 1.20. The market risk premium
is 6.8 percent and the risk-free rate is 4.4 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 22 percent. The project requires an
initial outlay...

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt-equity ratio of .70, but the industry target debt-equity ratio
is .75. The industry average beta is 1.10. The market risk premium
is 6.5 percent and the risk-free rate is 4.5 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 21 percent. The project requires an
initial outlay...

Acme Storage has a market capitalization of $104
million, and debt outstanding of $136 million. Acme plans to
maintain this same debt-equity ratio in the future. The firm pays
an interest of
7.5% on its debt and has a corporate tax rate of
38%.
a. If Acme's free cash flow is expected to be $21.60
million next year and is expected to grow at a rate of 3% per
year, what is Acme's WACC?
b. What is the value of...

These statements are true of false? Explain.
1) In DCF valuation, a company can increase its return on equity
(ROE) by increasing
its leverage ratio if and only if its return on capital (ROC)
exceeds its after-tax cost of
debt (rd x (1 - Tc)). (Assume all other inputs are fixed.)
2) In the context of the dividend discount model (DDM), a
company can always increase
its intrinsic equity value by increasing its dividend payout ratio
if and only if...

A firm is expected to grow in perpetuity at a rate of 2.8%. If
the next year free cash flow expected is 20 million, the cost of
equity is 14%, cost of debt is 7% and the target debt to equity
ratio is 1, then what is the value of this firm today if the tax
rate is 20%?

The free cash flow to the firm is reported as $198 million. The
interest expense to the firm is $15 million. If the tax rate is 35%
and the net debt of the firm increased by $20 million, what is the
approximate market value of the firm if the FCFE grows at 3% and
the cost of equity is 14%?
$3,098 billion
$2,585 billion
$1,950 billion
$2,497 billion

Blue Angel, Inc., a private firm in the holiday gift industry,
is considering a new project. The company currently has a target
debt–equity ratio of .30, but the industry target debt–equity ratio
is .25. The industry average beta is 1.40. The market risk premium
is 8 percent, and the risk-free rate is 6 percent. Assume all
companies in this industry can issue debt at the risk-free rate.
The corporate tax rate is 35 percent. The project requires an
initial outlay...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 2 minutes ago

asked 8 minutes ago

asked 11 minutes ago

asked 14 minutes ago

asked 17 minutes ago

asked 25 minutes ago

asked 27 minutes ago

asked 28 minutes ago

asked 30 minutes ago

asked 31 minutes ago

asked 34 minutes ago

asked 35 minutes ago