The FCFE (free cash flow to the equity) is projected to be $0.3 billion forever, the cost of equity equals 15% and the WACC s 10%. If the market value of the debt is $1.0 billion, what is the value of the equity using the free cash flow valuation approach? The firm does not have any short-term investments that are unrelated to operations. O $2 billion $3 billion $4 billion O$1 billion

The FCFE (free cash flow to the equity) is projected to be $0.3 billion forever, the cost of equity equals 15% and the WACC s 10%. If the market value of the debt is $1.0 billion, what is the value of the equity using the free cash flow valuation approach? The firm does not have any short-term investments that are unrelated to operations. O $2 billion $3 billion $4 billion O$1 billion

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

See similar textbooks

Similar questions

Consider a firm that is currently all-equity financed. The firm produces a perpetual EBIT of $100m per annum and has an all-equity cost of capital (required return on equity) of 10 per cent. The corporate tax rate is 30 per cent, and the interest rate on debt is 3 per cent. The company is to be acquired under a LBO, under which an initial level of debt of $500m will be taken on, with repayment of $100m per year and interest on the principal at the end of each of years 1, 2, and 3. A level of debt of $200m will then be maintained in perpetuity. a. Calculate the present value of interest tax shield, you may assume that you can discount any debt-related cash flows at the cost of debt. b. Calculate the value of the firm before LBO c. Calculate the value of the firm following LBO using the APV method
5. Business and financial risk Aa Aa The impact of financial leverage on return on equity and earnings per share Consider the following case of Lost Pigeon Aviation: Suppose Lost Pigeon Aviation is considering a project that will require $200,000 in assets. The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 25,000 shares. The company incurs a tax rate of 35%. If the project is financed using 100% equity capital, then Lost Pigeon Aviation's return on equity (ROE) on the project will be In addition, Lost Pigeon's earnings per share (EPS) will be Alternatively, Lost Pigeon Aviation's CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shares outstanding. Lost Pigeon Aviation's ROE and the company's EPS will be if management decides to…
/
A firm has two independent projects, each requiring investment of INR 3 million, but each of these have different risk profiles, i.e., different costs of capital as below: Project A 17%, Project B 7% IRRs for A and B are 20% and 9% respectively. The firm would maintain a 30:70 debt-equity ratio and expects its net income to be 6 million INR. If this firms maintains a residual dividend policy (all cash distributed as dividends), what will be the pay-out ratio for this firm?
The value of a firm's future cash flows is estimated at 230M. The continuously compounded risk-free rate is 3%. The duration of firm's debt is 11 years. The face value of the firm's debt is 280M. The volatility of firm cash flows is 0.22. The firm pays no dividends. Use the notion of equity as a call option on the value of the firm. Let the firm now accept a project that has an NPV of -10M and increases the volatility of the firm to 0.30. What is the new value of the firm's equity?
3. Toran plc. is an all-equity financed firm and generates earnings of £200 per year. Its current required rate of return on equity is 10% per annum. It is planning to issue corporate debt at a rate of 8% to achieve a debt-equity ratio of 50%. Toran plc. Assume that debt and earnings are perpetuities. What happens to the firm value after the debt issuance? Assume there are perfect capital markets. 100 0 200 0 250 0 400 0 450 0
Stevensons bakeries and all equity firm that has a projected perpetual EBIT of $144,000 per year. The cost of equity is 10.5% and the tax rate is 21%. Assume there's no depreciation, no capital spending and no change in networking capital. The firm can borrow perpetual debt at 5.8%. Currently, the firm is considering converting to a debt equity ratio of .54. What is the firms levered value? MM assumptions hold.
(c) Suppose an insurance company has £350 million in capital available. The gain from an investment portfolio of this bank during 12-month period is normally distributed with a mean of £70 million and a standard deviation rate of £160 million. The insurance company considers 99% 12-month value at risk (a=2.33) for setting its economic capital. Assume the 1% tail of the loss distribution has the following values: 0.6% probability corresponds to a £700 million loss and 0.4% probability corresponds to a £20 million loss. Calculate annual risk-adjusted return on capital (RAROC) of the investment portfolio, which considers the expected tail loss.
You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm: A- whenever EBIT exceeds $428,000 B- whenever EBIT is less than $428,000 C- only when EBIT is $428,000 D- only if the debt is decreased by $428,000 E- only is the debt is increased by $428,000
What is the company's cost of debt? a. 9.21%b. 10.31%c. 11.5%d. 7.73% What is the company's cost of equity using the Capital Asset Pricing Model? a. 9.21%b. 10.31%c. 11.5%d. 7.73%
A firm has target debt-equity ratio of 0.60. The flotation cost for equity is 5% and the flotation cost for debt is 3%. The firm needs $10,000,000 investment to undertake a project. How much should the firm raise to account for flotation costs and the initial investment need of the project? O $10,395,010 O $10,416,667 $11,000,821 $10,572,912 O $10,443,864
Stanbo Bank has a credit portfolio of R8bn with an average portfolio PD of 1.2%.The net income or margin is 2.7%. If the portfolio collapses, about 40% ofrecovery can happen. Therefore, the maximum loss would be R4.8bn (60% x8bn). Hence, roughly the outcome shows a gain of R216m versus a loss ofR4.8bn. Stanbo Bank maintains 10% capital adequacy ratio and the portfolioexposure (RWA) is R8bn. Based on the Kelly Criterion, how much capital buffershould Stanbo Bank maintain?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS