The tax rate is 40 and chocco has no debt the risk

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The tax rate is 40% and Chocco has no debt. The risk-free rate in the UK is 2% and the market risk premium is 6%. A traded comparable firm, Catbury, has the following balance sheet information: Solution: Discount rate: 𝛽 𝐴 = ? ? + ? 𝛽 ? + ? ? + ? 𝛽 ? = 100 150 ∗ 1.5 + 0 = 1 𝑟 𝐴 = 𝑟 ? + 𝛽 𝐴 ∗ 6% = 8%. Taxes are .4*50=20, so free cash flow is 30K. This is a perpetuity, so the value of the firm is 30K/.08 = 375K Equity market value 100 Debt 60 Excess cash 10 Beta equity 1.5 Beta debt 0
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11 Once we have estimates for a firm’s expected return on debt and equity securities, we can estimate the firm’s weighted