Compressed Adjusted Present Value Schwarzentraub Corporation's expected free cash flow for the year is $300,000; in the future, free cash flow is expected to grow at a rate of 8%. The company currently has no debt, and its cost of equity is 12%. Its tax rate is 25%.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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- Start with the value of the unlevered firm, \( V_u \) from part a. Use the MM model (with taxes but with zero growth) to calculate \( V_L \). *(Hint: This answer will differ from that in part b due to differences in growth assumptions.)* Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

  $ \_\_\_\_ \text{ million} $

- Start with the value of the unlevered firm, \( V_u \) from part a. Use the MM model (with taxes but with zero growth) to calculate \( r_{SL} \). *(Hint: This answer will differ from that in part b due to differences in growth assumptions.)* Round your answer to one decimal place.

  \(\_\_\_\_ \%\)
Transcribed Image Text:- Start with the value of the unlevered firm, \( V_u \) from part a. Use the MM model (with taxes but with zero growth) to calculate \( V_L \). *(Hint: This answer will differ from that in part b due to differences in growth assumptions.)* Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. $ \_\_\_\_ \text{ million} $ - Start with the value of the unlevered firm, \( V_u \) from part a. Use the MM model (with taxes but with zero growth) to calculate \( r_{SL} \). *(Hint: This answer will differ from that in part b due to differences in growth assumptions.)* Round your answer to one decimal place. \(\_\_\_\_ \%\)
### Compressed Adjusted Present Value

Schwarzentraub Corporation's expected free cash flow for the year is $300,000; in the future, free cash flow is expected to grow at a rate of 8%. The company currently has no debt, and its cost of equity is 12%. Its tax rate is 25%. Suppose the firm issues $3 million debt at a rate of 8%. Use the compressed adjusted value approach to answer the following questions. Do not round intermediate calculations.

- **Find \( V_u \):** Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

  - \[$\_\_\_\_\_] million

- **Find \( V_L \):** Use the APV model that allows for growth. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places.

  - \[$\_\_\_\_\_] million

- **Find \( r_{SL} \):** Use the APV model that allows for growth. Round your answer to one decimal place.

  - \[\_\_\_\_\_] %
Transcribed Image Text:### Compressed Adjusted Present Value Schwarzentraub Corporation's expected free cash flow for the year is $300,000; in the future, free cash flow is expected to grow at a rate of 8%. The company currently has no debt, and its cost of equity is 12%. Its tax rate is 25%. Suppose the firm issues $3 million debt at a rate of 8%. Use the compressed adjusted value approach to answer the following questions. Do not round intermediate calculations. - **Find \( V_u \):** Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. - \[$\_\_\_\_\_] million - **Find \( V_L \):** Use the APV model that allows for growth. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. - \[$\_\_\_\_\_] million - **Find \( r_{SL} \):** Use the APV model that allows for growth. Round your answer to one decimal place. - \[\_\_\_\_\_] %
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