systemSpecs is a software company. In the most recent financial year, the firm had operating earnings before interest and taxes of $200 million and earned an additonal interest income of $10 million on its cash balance of $420 million. The firm has a debt ratio of 13%, a return on capital of 12% on operating assets, a cost of debt of 8% and a tax rate of 30%. The firm is expected to grow 5% per year forever. The unlevered beta for other database software firms is 1.7, and these firms have on average cash balances of 12% of firm value. The risk-free rate is 3% and the market risk premium is 5%. What is the firm's value (in $ million)?
systemSpecs is a software company. In the most recent financial year, the firm had operating earnings before interest and taxes of $200 million and earned an additonal interest income of $10 million on its cash balance of $420 million. The firm has a debt ratio of 13%, a return on capital of 12% on operating assets, a cost of debt of 8% and a tax rate of 30%. The firm is expected to grow 5% per year forever. The unlevered beta for other database software firms is 1.7, and these firms have on average cash balances of 12% of firm value. The risk-free rate is 3% and the market risk premium is 5%. What is the firm's value (in $ million)?
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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![systemSpecs is a software company. In the most recent financial year, the firm had
operating earnings before interest and taxes of $200 million and earned an additonal
interest income of $10 million on its cash balance of $420 million.
The firm has a debt ratio of 13%, a return on capital of 12% on operating assets, a
cost of debt of 8% and a tax rate of 30%. The firm is expected to grow 5% per year
forever.
The unlevered beta for other database software firms is 1.7, and these firms have on
average cash balances of 12% of firm value.
The risk-free rate is 3% and the market risk premium is 5%.
What is the firm's value (in $ million)?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F3c1b79bd-ec90-48fd-be7a-92b723031db9%2F4b6f2e6d-ad20-4290-9b53-024daa2e114c%2Fontqdii_processed.jpeg&w=3840&q=75)
Transcribed Image Text:systemSpecs is a software company. In the most recent financial year, the firm had
operating earnings before interest and taxes of $200 million and earned an additonal
interest income of $10 million on its cash balance of $420 million.
The firm has a debt ratio of 13%, a return on capital of 12% on operating assets, a
cost of debt of 8% and a tax rate of 30%. The firm is expected to grow 5% per year
forever.
The unlevered beta for other database software firms is 1.7, and these firms have on
average cash balances of 12% of firm value.
The risk-free rate is 3% and the market risk premium is 5%.
What is the firm's value (in $ million)?
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