Question

You estimate that the free cash flows of a firm will be $2million, $10million, $18million and $20million over the

next four years. You estimate (properly) that the cash flows will grow at 4% thereafter (and you are comfortable with the steady-state year free cash flow). You have calculated the cost of equity capital = 15.5% and the pre-tax cost of debt capital = 7%. The average tax rate is 20%, and the marginal tax rate is 40%. The firm is currently operating with a D/E ratio of 1.0, and the target D/E ratio is 0.30. Calculate the value of the firm.

A)   $178.45 million                  B) $160.60 million                   C) $247.04 million

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