Smith Savings is unlevered. The company expects to have Free cash flow of $8 in perpetuity. The company's unlevered cost of capital is 10%. This company pays all of Free cash flow out as dividends. The firm is considering issuing $20 in debt with a cost of debt of 4%. Based on this information, will the firm's new value be more or less than $89? More than $89 Less than $89

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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Smith Savings is unlevered. The
company expects to have Free
cash flow of $8 in perpetuity. The
company's unlevered cost of
capital is 10%. This company pays
all of Free cash flow out as
dividends. The firm is considering
issuing $20 in debt with a cost of
debt of 4%. Based on this
information, will the firm's new
value be more or less than $89?
More than $89
Less than $89
Transcribed Image Text:Smith Savings is unlevered. The company expects to have Free cash flow of $8 in perpetuity. The company's unlevered cost of capital is 10%. This company pays all of Free cash flow out as dividends. The firm is considering issuing $20 in debt with a cost of debt of 4%. Based on this information, will the firm's new value be more or less than $89? More than $89 Less than $89
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