1. "A firm pays dividends of $5 million once annually. Analysts expect the dividends to remain at this amount indefinitely. The cost of equity is 14%.
a. Calculate the value of the firm.
b. Analysts now expect that dividends will grow annually by 3%. Calculate the firm value."
2. A firm has expected free cash flows to the firm of $12 million annually which are expected to grow at 3.5% each year. It uses both debt and equity. The cost of equity is 13% and the after-tax cost of debt is 7.5%. The debt to asset ratio is 40%. Calculate the value of the firm.
3. "A firm has the projected cash flows as indicated below.
a. Assuming the Year 5 free cash flow amount is expected to grow at 3% annually indefinitely and the firm has a Weighted Average Cost of Capital (WACC) of 9.8% calculate the firm value.
b. If the market value of the debt is $170 million what is the value of equity?"
| Year |
Free Cash Flow to Firm
($ in millions) |
| 0 |
$25 |
| 1 |
$30 |
| 2 |
$33 |
| 3 |
$35 |
| 4 |
$37 |
| 5 |
$38 |