1

Use the below information to value the debt in a levered company with annual perpetual cash flows from assets that grow. The next cash flow will be generated in one year from now.

Data on a Levered Firm with Perpetual Cash Flows

Item abbreviation	Value	Item full name
FFCF (millions)	$10.6	Firm free cash flow (or Cash Flow from Assets)
g	2% pa	Growth rate of OFCF
rD	3% pa	Cost of debt
rEL	7% pa	Cost of levered equity
D/VL	40% pa	Debt to assets ratio, where the asset value includes tax shields
tc	30%	Corporate tax rate

The current value of debt is

a.

139.47

b.

187.06

c.

124.71

d.

145.63

e.

348.68

2

A stock pays annual dividends. It just paid a dividend of $2. The growth rate in the dividend is 3% pa. You estimate that the stock's required return is 9% pa. Both the discount rate and growth rate are given as effective annual rates.

Which of the following statements is NOT correct?

a.

The share price at time t=0 is $34.33

b.

Dividend growth rate is equal to the long term expected dividend yield.

c.

The dividend at time t=3 will be $2.185

d.

Total return of the stock is equal to the company's long term cost of equity.

e.

The capital return of the stock is 3%