As a treasury analyst, you are trying to value a potential target company X Co. The...
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As a treasury analyst, you are trying to value a potential target company X Co. The capital structure ratio (D/E) currently for X Co. is 70%. The regression analysis between X Co.'s stock returns and market returns returned a coefficient of 2.5 for the market returns. The corporate tax rate is 25%. The YTM of Indian government t-bill is 6%, and the market risk premium is 9%. The beta of debt is negligible. The FCFF projections are Rs. 250 million for Year 1, growing at 5% per annum from Year 1 to Year 3 (i.e. 1-2, 2-3). Beyond three years, FCFF for X Co. will grow at a constant rate of 2% per annum till perpetuity. The existing debt outstanding is Rs. 2500 million (considered a perpetual debt). The bond rating is B. The direct and indirect expected cost of bankruptcy is assumed to be 35% of the unlevered firm value. Calculate the value of the levered firm (range in Rs. million). [10] Bond rating B- B Default rate 32.5% 26.36% As a treasury analyst, you are trying to value a potential target company X Co. The capital structure ratio (D/E) currently for X Co. is 70%. The regression analysis between X Co.'s stock returns and market returns returned a coefficient of 2.5 for the market returns. The corporate tax rate is 25%. The YTM of Indian government t-bill is 6%, and the market risk premium is 9%. The beta of debt is negligible. The FCFF projections are Rs. 250 million for Year 1, growing at 5% per annum from Year 1 to Year 3 (i.e. 1-2, 2-3). Beyond three years, FCFF for X Co. will grow at a constant rate of 2% per annum till perpetuity. The existing debt outstanding is Rs. 2500 million (considered a perpetual debt). The bond rating is B. The direct and indirect expected cost of bankruptcy is assumed to be 35% of the unlevered firm value. Calculate the value of the levered firm (range in Rs. million). [10] Bond rating B- B Default rate 32.5% 26.36%
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Answer rating: 100% (QA)
To value the levered firm we will use the discounted cash flow DCF method The formula for the value of ... View the full answer
Related Book For
Money Banking and Financial Markets
ISBN: 978-0078021749
4th edition
Authors: Stephen Cecchetti, Kermit Schoenholtz
Posted Date:
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