Question

Jeanette's Medical Supply has a beta of 1.47 and its RWACC is 11.8 percent. The market...

Jeanette's Medical Supply has a beta of 1.47 and its RWACC is 11.8 percent. The market risk premium is 7.4 percent, and the risk-free rate is 3.6 percent. The firm's cash flow at Time 3 is $73,900 with a growth rate of 2.2 percent. What is the terminal value of the firm at Time 3?

Homework Answers

Answer #1

We are given,

WACC = 11.8%

Cash flow in yr 3 = $73,900

Growth rate(g) = 2.2%

We can calculate the terminal value by the following formula,

The terminal value of the firm at time 3 = Cash flow in year 3 * (1 + g) / (WACC - g)

Terminal value = 73900 * (1+0.022) / (.118 - 0.022)

Terminal value = $786,727.08

  • We use WACC in calculating terminal value as we are given free cash flow to the firm. If we were given free cash flow to equity then we would have taken return on equity to discount the value.

Hence Terminal Value at time 3 = $786,727.08

If you have any doubts please let me know in the comments. Please give a positive rating if the answer is helpful to you. Thanks.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Rollins' beta is 1.6 , the risk-free rate is 4 percent, and the market risk premium is 5 percent. Rollins is a constant-growth firm which just paid a dividend of $2.00, sells for $30 per share, and has a growth rate of 5 percent. The firm's policy is to use a risk premium of 5 percentage points...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon rate paid semiannually, a current maturity of 20 years, and a price of $1,000. The firm could sell preferred stock dividends at $12 with a price of $100. Rollins's beta is 1.2, the risk-free rate is 11 percent, and the market risk premium is 5 percent. Rollins is a constant-growth...
Company XYZ has a target capital structure of 20 percent debt and 80 percent equity. Its...
Company XYZ has a target capital structure of 20 percent debt and 80 percent equity. Its bonds pay an average 6 percent coupon (semi-annual payout), mature in 7 years, and sell for $1049.54 per $1,000 in face value. The company stock beta is 1.02 versus the market. The risk-free rate of interest is 4 percent and the market risk premium is 6 percent. The company is a mature, constant growth firm that just paid a dividend (D0) of $2.57 and...
Preston Corp. is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
Preston Corp. is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sells for $1,100. The firm could sell, at par, $100 preferred stock which pays a 5.46 percent annual dividend, but flotation costs of 5 percent would be incurred. Preston's beta is 1.2, the risk-free rate is 3 percent, and the market...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent...
Rollins Corporation is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market...
The Treasury bill rate is 3.9%, and the expected return on the market portfolio is 11.8%....
The Treasury bill rate is 3.9%, and the expected return on the market portfolio is 11.8%. Use the capital asset pricing model. a. What is the risk premium on the market? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) Risk premium             % b. What is the required return on an investment with a beta of 1.4? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)...
The market risk premium is 5.0 percent, and the risk-free rate is 4.9 percent. If the...
The market risk premium is 5.0 percent, and the risk-free rate is 4.9 percent. If the expected return on a bond is 6.0 percent, what is its beta?
Piedmont Hotels is an all-equity company. Its stock has a beta of 1.17. The market risk...
Piedmont Hotels is an all-equity company. Its stock has a beta of 1.17. The market risk premium is 6.6 percent and the risk-free rate is 2.4 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 1.6 percent to the project's discount rate. What should the firm set as the required rate of return for the project? Multiple Choice 8.52% 8.91% 10.12% 7.31% 11.72% Bermuda Cruises issues...
A stock has an expected return of 17.5 percent.  The beta of the stock is 2.83 and...
A stock has an expected return of 17.5 percent.  The beta of the stock is 2.83 and the risk-free rate is 2.9 percent.  What is the market risk premium?
ABC company stock has a beta of 1.3. The market risk premium is 6.7 percent, and...
ABC company stock has a beta of 1.3. The market risk premium is 6.7 percent, and the risk free rate is 4 percent. The company’s last dividend was $2.00 per share, and the dividend is expected to grow at 4.8 percent indefinitely. The stock currently sells for $25. What is the company’s cost of capital using the SML approach? Using the dividend growth model?    A. 8.81 percent; 8.00 percent     B. 12.71 percent; 12.80 percent     C. 11.90 percent;...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT