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MANU has a market cap of $ 100 million and debt of $ 40 million. MANU...

MANU has a market cap of $ 100 million and debt of $ 40 million. MANU wishes to maintain the same capital structure in the future. The corporate tax rate is 33%. If the free cash flow forecasted by MANU for next year are $ 7 million and their expected growth every year is 3% perpetually, what is the after-tax weighted average cost of capital (WACC) of the MANU business?

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Answer #1

value of firm = market cap + debt = $100 million + $40 million = $140 million

value of firm = expected FCF / (WACC - growth rate)

$140 million = $7 million / (WACC - 3%)

WACC = ($7 million / $140 million) + 3%

WACC = 8.00%

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