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A. Given are the following data for year 1:

Revenue = $45 million; Variable cost = $10 million; Fixed cost = $5 million; Depreciation = $1 million; Interest expense = $3 million; capital Investment = $12 million; change in working capital = $2 million. Corporate tax rate is 30%. Calculate the free cash flow to firm (FCFF) for year 1:


B. Firm A has a value of $500 million and Firm B has a value of $300 million. Firm A has 1000 shares outstanding, and Firm B has 1000 shares outstanding. Suppose that the merger would increase cash flows of the combined firm by $5 million in perpetuity. Assuming the cost of capital for the new firm is 10%.


If Firm A purchases Firm B for $330 million, how much do Firm B's shareholders gain from this merger?


c. Alpha Corporation has earnings before interest and tax (EBIT) per annum in perpetuity of $28,714. The tax rate is 30%. The firm is funded $50,000 of debt and $100,000 of equity. The cost of equity is 18% and the cost of debt is 6%.


Given the information above, what is the appropriate discount rate if earnings before interest and tax (EBIT) are used to calculate the value of the firm?

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Subject: Business, Finance

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