Suppose Leroy’s Shipping (LS) has a total of $500 in debt. The company expects to generate $151.52 in cash flows before interest and taxes in perpetuity. LS can issue perpetual debt at an interest rate of 10%. Unlevered firms in the same industry have a cost of capital of 20%, and the corporate tax rate is 34%.
(a) Calculate the value of Leroy’s Shipping using the APV method.
(b) What is the WACC for Leroy’s Shipping? Does valuing the company using the WACC method yield the same answer?