Assignment%203 - FINC 727 Corporate transactions and...

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FINC 727: Corporate transactions and business valuation Professor Robert Hansen 1 Exercise 3. Growth models: two-part exercise. Please complete both parts. I. Blazer s Growth BLAZER TELECOM s has perpetual earnings before interest and taxes of $400 for the next three years, after which the earnings may grow indefinitely. The corporate tax rate is 40%. BLAZER uses a debt-to-equity ratio of 0.75. The debt is priced to yield the risk-free rate of interest. BLAZER's depreciation expenses are not tax deductible and just offset capital expenditures in each year, and changes in working capital are zero. BLAZER has a 100% payout policy. The risk-free interest rate is 8% and the market premium (market rate less the risk-free rate) is 8.5%. We don t know BLAZER's asset beta, but we believe Comp Co. s assets have the same risk as BLAZER. We know the following about Comp Co.: it debt value is $13,945, its market value of equity value is $7,000, its tax rate is 36%, its debt beta is 0.3725, and its equity beta is 1.80.
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