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...

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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:
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