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

11
Once we have estimates for a firm’s expected return on debt and
equity securities, we can estimate the firm’s weighted