Question

Use the below information to value a levered company with constant annual perpetual cash flows from assets. The next cash flow will be generated in on year from now, so a perpetuity can be used to value this firm. Both the operating free cash flow (OFCF) and firm free cash flow (FFCF) are constant (but not equal to each other). Data on a Levered Firm with Perpetual Cash Flows Item Abbreviation Value Operating Free Cash Flow OFCF $216m Firm free cash flow (or cash flow from assets levered) FFCF $225m Growth rate of cash flow from assets, levered and unlevered g 5% Weighted average cost of capital before tax WACCBeforeTax 20% Weighted average cost of capital after tax WACCAfterTax 19.4% Cost of debt rD 10% Cost of levered equity rEL 22.5% Debt to assets ratio, where the asset value includes tax shields D/VL 20% Number of shares n 100m Corporate tax rate tc 30% What is the firm’s current share price? Select one: a. $15.6 b. $12.625 c. $12.6 d. $12.6 e. $11.4

Answer #1

**Answer:**

**Determination of Current
Share Price:**

To calculate the share price, we need to find the total market value initially.

**Now calculate the current
share price,**

**Therefore, the correct
answer is “Option
A”.**

Find the value of levered equity for this firm.
Assume the firm has perpetual cash flows. Use Miller &
Modigiiani's Proposition II concerning the
cost of equity.
You have the following information about the firm:
EBIT = $100 million
Tax rate - 35%
Debt = $150 million
Cost of debt = 8%
Unlevered cost of capital = 12%

Company XYZ generates annual cash-flows equal to USD 1 million,
in a perpetual way. For simplicity, we assume that the firm cost of
equity and cost of debt are both equal to 10 percent, and the firm
has a (perpetual) debt level equal to USD 1 million. Company XYZ is
incorporated in a country that currently has a corporate tax of 0
percent. It follows that the market value of the assets of Company
XYZ is USD 10 million. Suppose...

An unlevered firm has a value of $800 million. An otherwise
identical but levered firm has $40 million in debt at a 4% interest
rate. Its cost of debt is 4% and its unlevered cost of equity is
12%. After Year 1, free cash flows and tax savings are expected to
grow at a constant rate of 3%. Assuming the corporate tax rate is
40%, use the compressed adjusted present value model to determine
the value of the levered firm....

An unlevered firm has a value of $750 million. An otherwise
identical but levered firm has $40 million in debt at a 6% interest
rate. Its cost of debt is 6% and its unlevered cost of equity is
10%. After Year 1, free cash flows and tax savings are expected to
grow at a constant rate of 3%. Assuming the corporate tax rate is
40%, use the compressed adjusted present value model to determine
the value of the levered firm....

An unlevered firm has a value of $700 million. An otherwise
identical but levered firm has $40 million in debt at a 6% interest
rate. Its cost of debt is 6% and its unlevered cost of equity is
10%. After Year 1, free cash flows and tax savings are expected to
grow at a constant rate of 2%. Assuming the corporate tax rate is
35%, use the compressed adjusted present value model to determine
the value of the levered firm....

Assume a Modigliani and Miller world. All cash flows are
perpetuities. Parts A, B, and C below are 6, 6, and 8
points respectively.
Rent-a-Raptor is 100% equity financed. The firm is expected to
have perpetual EBIT of $70 million per year. The unlevered equity
or asset Beta is 1.0. The riskless rate is 4%, and the market risk
premium is 6%. There are 10 million shares of common stock
outstanding. The corporate tax rate is 40%.
A. Calculate the...

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...

Horizon Value of Free Cash Flows
Current and projected free cash flows for Radell Global
Operations are shown below.
Actual
2016
2017
Projected
2018
2019
Free cash flow
$606.82
$667.50
$707.55
$750.00
(millions of dollars)
Growth is expected to be constant after 2018, and the weighted
average cost of capital is 11.05%. What is the horizon (continuing)
value at 2019 if growth from 2018 remains constant? Round your
answer to the nearest dollar. Do not round intermediate
calculations

Horizon Value of Free Cash Flows Current and projected free cash
flows for Radell Global Operations are shown below.
Actual
2016
2017
Projected
2018
2019
Free cash flow
$602.40
$663.08
$703.13
$759.38
(millions of dollars)
Growth is expected to be constant after 2018, and the weighted
average cost of capital is 11.55%. What is the horizon (continuing)
value at 2019 if growth from 2018 remains constant? Round your
answer to the nearest dollar. Round intermediate calculations to
two decimal places.

• AWC does not grow; it generates a constant annual cash flow of
$100m per year forever
• AWC holds $250m in cash and has no debt (it is an all-equity
financed firm)
• AWC has 100 million of shares outstanding and its shareholders
expect a return of 10% on their investment
• The value of AMC non-cash assets is thus the present value of
a no-growth perpetuity of $100m at 10%1:
V(non-cash assets) = $100/10% = $1,000
• The...

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