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s/ bbhosted.cur yedu/webapps/assessment take launchpsp?course assessment id=-1086273-1&course; d 463304-1&content;_id' 33255053-1&step.; ¥ Quest on Completion Status QUESTION 1 10 points Saved Q1-06 are based on the following information: You are trying to value a private company, The company has 5 million of debt and 4 million of book equfty, The ratio of market value to book value for simlar frms is 2. You decide to use this ratio to estimate the market value of equity as the input for the weights in WACC calculation. The average beta for publicly traded firms in premium is 55% The interest rate for debt is 10% Here is the FCFF model for valuing the business Year s 2 and the average debt-to-equity rato for public firms n this ndustry is 0 4 The corporate tax rate is 40% The risk free rate ses and the market-k EBIT (EBIT grows at 15% for the first S2.30 $2.65 $3.04 $3.50 S4.02 S4.22 five years and 5% thereafter ) EBIT (1-Tax Rate) Less (Cap Expenditures Depreciaton) grows $ 115 $ 132 $ 152 $1.38 $1.59 $1.82 $2 10 $241 $2.53 175 $201 50 00 at same 15% annual rate as revenue for 5 years and are offsetting thereafter) Equals FCF Assuming after 5 years, the growth rate is 5% forever

Explanation / Answer

1) Unlevered beta = Levered beta / (1 + (1 - tax) x D/E) = 2 / (1 + (1 - 40%) x 0.4) = 1.61

2) Levered beta = Unlevered beta x (1 + (1 - tax) x D/E) = 1.61 x (1 + (1 - 40%) x 5/8) = 2.22

3) Cost of equity, ke = Rf + beta x MRP = 6% + 2.22 x 5.5% = 18.20%

4) WACC = we x ke + wd x kd x (1 - tax)

= 8 / (5 + 8) x 18.20% + 5 / (5 + 8) x 10% x (1 - 40%)

= 13.51%

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