maetsro frozen foods expects to earn 365000 in perpetuity before interest and taxes from its line of gourment tv dinners. the company has a debt to assets ratio of 40%. the cost of debt is 10%. if the company had no debt, its cost of capital would have been 15%. the firms tax rate is 30. what is the value of the firm? the value of its equity?The required rate of return on equity?the weighted average cost of capital?
If no debt, only equity then cost of capital is 15%
So, required Return on equity is 15%
Cost of debt = 10%
After tax cost of debt = Before tax cost*(1-tax rate)
10%*(1-40%)
6.00%
Debt to asset ratio is 40%. So debt = 0.40 and equity weight is 1-0.40 = 0.60
WACC = (weight of debt * cost of debt) + (weight of equity * cost of equity)
(0.40*6%)+(0.60*15%)
11.40%
Value of firm = EBiT*(1-tax rate)/WACC
365000*(1-40%)/11.40%
219000 /0.114
1921052.632
Value of firm is $1,921,052.63
Value of equity = Value of firm*Equity weight
1921052.63*60%
= $1152631.579
So, value of equity is $1,152,631.58
WACC is 11.40% and Return on Equity is 15%
maetsro frozen foods expects to earn 365000 in perpetuity before interest and taxes from its line...
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5. Assuming the free cash flows from synergy will remain level
in perpetuity, estimate the after-tax present value of anticipated
synergy?
Please show all steps.
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