MM Extension with Growth Schwarzentraub Industries\' expected free cash flow for
ID: 2749444 • Letter: M
Question
MM Extension with Growth Schwarzentraub Industries' expected free cash flow for the year is $450,000; in the future free cash flow is expected to grow at a rate of 10%. The company currently has no debt, and its cost of equity is 14%. Its tax rate is 40%. (Hint: Use equations and .)
A)
Find VU. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
$ ______million
Find VL if Schwarzentraub uses $7 million in debt with a cost of 9%. Use the APV model that allows for growth. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ ________million
Find rsL. Round your answer to one decimal place. rsL =________ %
Based on VU from part a, find VL using the MM model (with taxes) if Schwarzentraub uses $7 million in 9% debt. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. $ ______million
Find rsL. Round your answer to one decimal place. rsL = ______%
Explain the difference between your answers to parts b and c. The input in the box below will not be graded, but may be reviewed and considered by your instructor.
Explanation / Answer
Free cashflow 0.45 VU [450000/(14%-10% )] 11.25 Cost of Debt 0.6300 Less: Tax benefit 0.2520 After tax cost 0.3780 Free cashflows 0.45 Less: Cost of Debt 0.3780 Net cashflows 0.07 Value of Equity [0.07/(14-10)%] 1.80 VL = 1.80 + 7 = 8.8 million RsL = [7 x 9% x (1-0.40) + 1.80 x 14%]/(7+1.8)= 7.16% as per MM model, VL = VU +T x D So VL = 11.25 + 0.4 x 7 = 14.05 rsL = (14.05-11.25) x 9% x 0.60 + 14% =14.15%
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