You are considering acquiring a firm that you believe will generate cash flows of $100,000 per year for 10 years, after which you are expecting to sell it for $150,000. You will only use equity financing for this project. The beta of the firm is believed to be .75. Of course, you know these cash flows are uncertain. All these cash flows are subject to a 25% corporate tax rate. a) How much is the firm’s worth if the risk-free rate is 5% and the expected market return is 12%? Show your work. b) If the actual beta of the firm turns out to be .50, by how much will you have valued the firm incorrectly? c) If it turns out that you over-projected the cash flows by 2%, by how much will you have valued the firm incorrectly?
You are considering acquiring a firm that you believe will generate cash flows of $100,000 per year for 10 years, after which you are expecting to sell it for $150,000. You will only use equity financing for this project. The beta of the firm is believed to be .75. Of course, you know these cash flows are uncertain. All these cash flows are subject to a 25% corporate tax rate.
a) How much is the firm’s worth if the risk-free rate is 5% and the expected market return is 12%? Show your work.
b) If the actual beta of the firm turns out to be .50, by how much will you have valued the firm incorrectly?
c) If it turns out that you over-projected the cash flows by 2%, by how much will you have valued the firm incorrectly?
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