Question

Use the information for the question(s) below. Flagstaff Enterprises is expected to have free cash flow...

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 as a levered firm is closest to: A. $111 million B. $100 million C. $114 million D. $140 million

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Weight of Debt is calculated as

= 0.3333

Weight of Equity = 1-Weight of Debt

= 1-0.3333

= 0.6667

WACC = Cost of Equity*Weight of Equity + Cost of Debt* Weight of Debt*(1-Tax rate)

= 13*0.66667 + 7*0.33333*(1-0.35)

= 10.1833%

Value of Firm = FCF1/(r-g)

Where, FCF1 is the expected free cash flow at time 1

r is the required return

g is growth rate

Value of Firm = $8million/(0.101833-0.03)

= $111.835 million

Since value of Flagstaff as a levered firm is closest to $111 million, the correct option is A.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Peter Corperations expects to have free cash flow in the coming year (FCF1) of $1.75 million,...
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?
Suppose that Ret is considering the acquisition of another firm in its industry for $100 million....
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...
Portage Bay Enterprises has $ 4 million in excess​ cash, no​ debt, and is expected to...
Portage Bay Enterprises has $ 4 million in excess​ cash, no​ debt, and is expected to have free cash flow of $ 13 million next year. Its FCF is then expected to grow at a rate of 2 % per year forever. If Portage​ Bay's equity cost of capital is 10 % and it has 4 million shares​ outstanding, what should be the price of Portage Bay​ stock?
Grexin corp is expexted to have free cashflow in the coming year of 6.25 million and...
Grexin corp is expexted to have free cashflow in the coming year of 6.25 million and its free cashflow is expected to grow at a 3% per year there after. Grexin corp has an equity cost of capital 10% and a debt cost of capital of 6% and it pays a corporate tax rate of 35%. Grexin corp maintains a debt equity ratio of 1 what is the current unlevered WACC? a. 0.0800 b. 77.8256 c. 125.000 d. 0.1000 e.33.2278...
Portage Bay Enterprises has $ 4 million in excess​ cash, no​ debt, and is expected to...
Portage Bay Enterprises has $ 4 million in excess​ cash, no​ debt, and is expected to have free cash flow of $ 9 million next year. Its FCF is then expected to grow at a rate of 4 % per year forever. If Portage​ Bay's equity cost of capital is  13% and it has 4 million shares​ outstanding, what should be the price of Portage Bay​ stock? a. The price of Portage​ Bay's stock is ​$_____ per share. 
Portage Bay Enterprises has $1 million in excess cash, no debt, and is expected to have...
Portage Bay Enterprises has $1 million in excess cash, no debt, and is expected to have free cash flow of $10 million next year. Its FCF is then expected to grow at a rate of 3% per year forever. If Portage Bay's equity cost of capital is 11% and it has 5 million shares outstanding, what should be the price of Portage Bay stock? Why is the answer = 10/(0.11-0.03), which is ($125 + $1)/5 = 25.2 and NOT =...
Use the following information and a Free Cash Flow to the Firm model to calculate the...
Use the following information and a Free Cash Flow to the Firm model to calculate the stock price for Andrews, Inc. Show your work. The free cash flow to the firm last year was 900.   The free cash flow is expected to grow at a rate of 10 percent annually for the next two years and remain the same thereafter. CAPM Equity Return 0.130 WACC 0.065 Cash & Marketable Sec. 580 Market Value of Debt 12,000 Book Value of Debt...
Portage Bay Enterprises has $ 1 million in excess​ cash, no​ debt, and is expected to...
Portage Bay Enterprises has $ 1 million in excess​ cash, no​ debt, and is expected to have free cash flow of $ 11 million next year. Its FCF is then expected to grow at a rate of 3 % per year forever. If Portage​ Bay's equity cost of capital is   13 % and it has 66 million shares​ outstanding, what should be the price of Portage Bay​ stock? The price of Portage​ Bay's stock is per share.  ​(Round to the...
Grexin corp is expexted to have free cashflow in the coming year of 6.25 million and...
Grexin corp is expexted to have free cashflow in the coming year of 6.25 million and its free cashflow is expected to grow at a 3% per year there after. Grexin corp has an equity cost of capital 10% and a debt cost of capital of 6% and it pays a corporate tax rate of 35%. Grexin corp maintains a debt equity ratio of 1 what is the value of Grexin today in millions, given its debt to equity ratio?...
M's FCF in the coming year is $8 million; this FCF is expected to grow at...
M's FCF in the coming year is $8 million; this FCF is expected to grow at 3% per year later. M 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 M keeps a 0.5 D/E ratio, what is its value and what us the value of teh internet tax shield?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT