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s/ bbhosted.cur yedu/webapps/assessment take/launchpsp?course assessment id=-1086273 1&course-de-14; 3304-1&content;_id.33255053-1&step.null; ¥ Quesbon 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 milion of book equfty, The ratio of market value to book value for simar firms is 2. You decide to use this ratio to estimate the market value of the same industry is 2. and the average debt-to-equity ratio for premium is 55% The interest rate for debt is 10% equity as the input for the weights in WACC calculation. The average beta for publicly traded firms in public firmsn this ndustry is 0 4 The corporate ta rate is 40% The nsk fee rates 6% and the market nsk Here is the FCFF model for valuing the business Year EBIT (EBIT grows at 15% for the first $2.30 $2.65 $3.04 $3.50 S4.02 S4.22 five years and 5% thereafter) EBIT (1-Tax Rate) Less (Cap. Expenditures-Depreciaton) grows $1.38 $1.59 $1.82 $2.10 $2 41 $253 $ 115 $132 152 175 201 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

Question No.3

Cost of Equity

Ke = Risk Free Rate+Beta (Risk Premium)

=6%+2(5.50)

=17%

Question No.4

Computation of WACC

Question No. 5 & 6

Notes

FCFF6 = FCFF5(1+g)/ko-g

=40(1.05)/0.1385-0.05

=42/0.0885

=474.58

Value of Equity = Value of Firm - Value of Equity

=351.21 Million - 4 Million

=347.21 Million

Particulars Cashflow Proportion % WACC Equity 10 Million (5*2) 0.7143 17% 12.14% Debt 4 Million 0.2857 6%(10*1-Tax Rate) 1.71% WACC 13.85%

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