Schwarzentraub Corporation's expected free cash flow for the year is $500,000; in the future, free cash flow

Question:

Schwarzentraub Corporation's expected free cash flow for the year is $500,000; in the future, free cash flow is expected to grow at a rate of 9%. The company currently has no debt, and its cost of equity is 13%. Its tax rate is 40%. Use the compressed adjusted value approach to answer the following questions.

a. Find VU.

b. Find VL and rsL if Schwarzentraub uses $5 million in debt with a cost of 7%. Use the APV model that allows for growth.

c. Based on VU from Part a, find VL and rsL using the MM model (with taxes) if Schwarzentraub uses $5 million in 7% debt.

d. Explain the difference between your answers to Parts b and c.

Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...