Question

The  following are the projected cash flows to equity holders (CFFE) and to the firm (FCFF) over the next five years:

Year             CF to equity   Interest-expense*(1-Tax rate)     CF to firm

1    $250.00    $90.00 $340.00

2 $262.50   $94.50 $357.00

3    $275.63    $99.23       $374.85

4 $289.41    $104.19 $393.59   

5 $303.88 $109.40    $413.27

After year 5, the projected annual growth rate in cash flows to the firm is 6%, while the projected annual growth rate in cash flows to equity holders is 3%.

The firm has a cost of equity of 12% and a cost of capital of 9.94%. Answer the following two questions. Show all your work and formulas to get credit (there is no credit for only showing a final answer). Underline your answers.

A. What is the current market value of equity in this firm?

B. What is the current value of the firm?

Answer 1