Question

The current Free cash flow to the firm is $185 million. The interest expense to the firm is $20 million. If the tax rate is 40% and the net debt of the firm increased by $15 million, what is the estimated value of the firm if the FCFE grows at 5% and the cost of equity is 10 % ? $2,168 million В. A. $2.397 million $3,760 million $3,948 million C. D. Cache Creek Manufacturing Company is expected to pay a dividend of $1 in the upcoming year. Dividends are expected to grow at 7% per year. The stock's current price is $20.00. Using the constant growth DDM, the market capitalization rate is_ A. 9% В. 12% C. 14% D. 18% The free cash flow to firm is expected to be $2 million and remains constant forever, the WACC is 10 % and the cost of equity is 15 %. If the market value of the debt is $5 million, what is the value of the equity? $15 million $20 million A В. C. $13.33 million $8.33 million D.

Answer 1

FCFE = FCFF + Net borrowing - Interest*(1-t)

1.

FCFF = $185 Million

Net Borrowing = $15 Million

Interest * (1-t) = 20*(1-0.40) = $12 Million

So FCFE = $185 + $15 - $12 = $188 Million

FCFE grows at 5% indefinitely

Value of the firm = FCFE/(ke-g)
= $188 million / (0.10 -0.05)
= $3,760 million

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