Homework Answers
After-tax cost of debt= cost of debt* (1-tax rate)
= 8%*(1-0.2)
= 6.4%
Weighted average cost of capital= Weight of debt* after-tax cost of debt+ weight of equity* cost of equity
10% = 0.2*6.4%+ 0.8*Ke
Ke = 10.9%
Cash flows available to equity shareholders= UCF- Interest after tax
Year 1= 5m- 4m*6.4% =4.744
Year 2 = 6m- 4m*6.4% = 5.744
Year 3 = 6m*105%- 4m*6.4% = 6.044
Horizon FTE = 6.044/(10.9%-5%) = $102.44
Value of equity = 4.744/(1+10.9%)^1 + (5.744+102.44)/(1+10.9%^2)
=111.191 million
Value of company = Value of equity + debt
= 111.191+ 4
= 115.191 million
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