Firm A has annual sales of $5 million and total costs of 60% of sales. Assume that the growth rate for the company is 5%, with sales and costs growing proportionally. Firm A has leverage ratio, D+E, of 40%, which they intend to maintain going forward, and is currently (i.e., in this year) making annual interest payments of $200,000 on its debt. The required return to equity is 18%, and the corporate tax rate is 40%.

a. What is the value of Firm A’s equity today?

b. Based on the same information as above, what is Firm A’s overall value?

c. Calculate the WACC for Firm A.

Answer rating: 100% (QA)

a WACC EV x Re DV x Rd x 1 T Where E market value of equity D market value of debt V total value of capital equity plus debt EV percentage of capital ... View the full answer