Question

Review Later 100 Free Cash Flow Growth rate Tax Rate Cost of Capital Debt-to-total value 2% 1% 5% 50% Given the data in the above table, what is the terminal value of the business (using the growing perpetuity formula)? 3000 3400 000 3600 3366

Answer 1

Given that Overall Cost of Capital is 5% Which comprises 50% weight of Debt as Debt to total Value is 50%

Hence, Cost of Debt would be : - 2.5% (5%X50%)

Since Interest Cost enjoys Tax benefit then Cost of Debt would be considered after giving benefit of Tax which 1%

Cost of Debt after Tax Benefit = 2.5X(1-T) = 2.5X(1-0.01) = 2.25%

Total Cost of Debt would be = 2.475 + 2.5 = 4.97

Formulae for Perpetuity = P0/(Kc - G )

P0 = Free cash flow = 100

Kc = Cost of Capital = 4.97%

g = growth rate = 2%

Hence,  

= 100/(4.97%-2%) = 3366

Correct Answer is Option D : - 3366

Answer 2