Question

4. Tri Co. has the following cost of debt structure: wd 0% 20% 30% 40% 50%...

4. Tri Co. has the following cost of debt structure:

wd

0%

20%

30%

40%

50%

rd

0.0%

10.0%

12.0%

14.0%

15.0%

The market risk premium is 7%, the risk free rate is 4%, beta of unleveraged firm is 1.10, Hamada’s equation b= bU [1 + (1 - T)(wd/we)]. Tax rate T = 35%.

Please use the above information to answer following questions:

a. If the firm uses 40% debt, what is the cost of equity of the firm, based on CAPM model?

b. What is WACC of the firm?

c. If FCF0 = 300 million, g=4%, what is the firm value?

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