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Suppose that you’ve obtained the following information about Park Avenue Parking, Inc. Next year’s free cash...

Suppose that you’ve obtained the following information about Park Avenue Parking, Inc. Next year’s free cash flow to the firm is expected to be $7,500,000. Free cash flows are expected to grow at an annual rate of 2%. The firm’s equity beta is estimated to be 1.5, and the firm’s debt beta is estimated to be 0.3. The risk-free rate is 3% and the market risk premium is 6%. The market value of the firm’s debt is estimated to be $10,000,000, and the firm’s tax rate is 40%. Use iterative valuation to derive the current value of Park Avenue Parking.

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Value of firm= Free cashflow(1+g)/(RE-g)

g= growth rate,=2%

free cash flow=7500000

RE= Required rate of return= RF+ Beta× market risk premium

=3+1.8×6=13.8

(RF= risk free rate of return=3%

market risk premium= 6%

Beta=equity beta+ debt beta=1.5+0.3= 1.8)

Now= value of firm=Free cashflow(1+g)/(RE-g)=7500000(1+0.02)/(13.8-2)=648305 answer

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