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%.
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
Problem 1PS
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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.
- \[\_\_\_\_\_] %](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe9d9a5f0-fe4e-422d-8c50-a22c93ec0936%2Fd5168f65-400f-4b21-90f3-ed1d55be66df%2F1soakaa_processed.jpeg&w=3840&q=75)
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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