SolutionsExercisesBook7th_Chap18.pdf - Chapter 18 Valuation and Capital Budgeting for the Levered Firm 18.3 a In order to value a firm\u2019s equity using

# SolutionsExercisesBook7th_Chap18.pdf - Chapter 18 Valuation...

• Homework Help
• 3

This preview shows page 1 - 2 out of 3 pages.

Answers to End-of-Chapter Problems 18-1 Chapter 18: Valuation and Capital Budgeting for the Levered Firm 18.3 a. In order to value a firm’s equity using the flow -to-equity approach, discount the cash flows available to equity holders at the cost of the firm’s levered equity. The cash flows to equity holders will be the firm’s net income. Remembering that the company has three stores, we find: Sales \$3,600,000 COGS 1,530,000 G & A costs 1,020,000 Interest 102,000 EBT 948,000 Taxes 379,200 NI \$568,800 Since this cash flow will remain the same forever, the present value of cash flows available to the firm’s equity holders is a perpetuity. We can discount at the levered cost of equity, so, the value of the company’s equi ty is: PV(Flow-to-equity) = \$568,800 / 0.19 PV(Flow-to-equity) = \$2,993,684.21 b. The value of a firm is equal to the sum of the market values of its debt and equity, or: V L = B + S We calculated the value of the company’s equity in part a , so now we need to calculate the value of debt. The company has a debt-to-equity ratio of 0.40, which can be written algebraically as:

#### You've reached the end of your free preview.

Want to read all 3 pages?

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern