You have been asked to value a firm with expected annual after-tax cash flows, before debt payments, of $150 million a year in perpetuity. The firm has a cost of equity of 12.5%, a market value of equity of $ 700 million and a market value of debt of $ 300 million. The debt is perpetual and the after-tax interest rate on debt is 7.00%. Estimate the cash flow to equity.
You have been asked to value a firm with expected annual after-tax cash flows, before debt payments, of $150 million a year in perpetuity. The firm has a cost of equity of 12.5%, a market value of equity of $ 700 million and a market value of debt of $ 300 million. The debt is perpetual and the after-tax interest rate on debt is 7.00%. Estimate the cash flow to equity.
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:You have been asked to value a firm with expected
annual after-tax cash flows, before debt payments,
of $150 million a year in perpetuity. The firm has a
cost of equity of 12.5%, a market value of equity of
$ 700 million and a market value of debt of $ 300
million. The debt is perpetual and the after-tax
interest rate on debt is 7.00%. Estimate the cash
flow to equity.
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