7-1_7-3sol - Problem 7.1 Traditional WACC Valuation Given...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Given Solution Legend Debt beta 0.20 = Value given in problem Levered equity beta 1.60 = Formula/Calculation/Analysis required Market Risk Premium 5% = Qualitative analysis or Short answer required Risk free rate 7% = Goal Seek or Solver cell Borrowing rate (before tax) 8% = Crystal Ball Input Tax rate 30.00% = Crystal Ball Output Solution After-tax cost of debt 5.60% Levered cost of equity 15.00% Years 1 2 3 4 Sales $100,000.00 $100,000.00 $100,000.00 $100,000.00 Operating income (Earnings Before Interest and Taxes) 22,000.00 22,000.00 22,000.00 22,000.00 Less: Cash tax payments $(6,600.00) $(6,600.00) $(6,600.00) $(6,600.00) Net operating profits after taxes (NOPAT) 15,400.00 15,400.00 15,400.00 15,400.00 Plus: Depreciation expense $8,000.00 $8,000.00 $8,000.00 $8,000.00 Less: Investments in Net Working Capital - - - - in new Capital (CAPEX) (8,000.00) (8,000.00) (8,000.00) (8,000.00) Total net investment for the period $(8,000.00) $(8,000.00) $(8,000.00) $(8,000.00) Firm free cash flow (FFCF) $15,400.00 $15,400.00 $15,400.00 $15,400.00 Equity Free Cash Flow Calculation 1 2 3 4 (Firm) Free Cash Flow 15,400.00 15,400.00 15,400.00 15,400.00 Less: Interest (1 - Tax Rate) (1,400.00) (1,400.00) (1,400.00) (1,400.00) (Equity) Free Cash Flow $14,000.00 $14,000.00 $14,000.00 $14,000.00 Debt Valuation Problem 7.1: Traditional WACC Valuation a. What is Canton's cost of equity capital? What is the after-tax cost of debt for the firm? b. Calculate the equity free cash flows for Canton for each of the next four years.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Present value of interest for Years 1-4 $6,624.25 Present value of principal in Year 4 18,375.75
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 8

7-1_7-3sol - Problem 7.1 Traditional WACC Valuation Given...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online