Question 1: An investor is planning to value company A. After careful estimation of cash flows, he
Question:
Question 1:
•An investor is planning to value company A. After careful estimation of cash flows, he projects the following cash flows for the firm in the following 5 years as.•Year 1: FCFF_1 = $50•Year 2: FCFF_2 = $60•Year 3: FCFF_3 = $70•Year 4: FCFF_4 = $80•Year 5: FCFF_5 = $90
The risk free rate of return is 3%, equity risk premium (market premium) is 6%. Beta is 1.2. For the terminal value, he assumes a perpetual growth rate of 3%. The corporate tax rate is 25%, and equity and debt is in equal proportion in the firm and the cost of debt borrowing is 10%.
Estimate the value of the firm.
Question 2:
•XYZ Corporation is projecting its Free Cash Flow to the Firm (FCFF) for the next 5 years. The FCFF projections are as follows:
Year 1: FCFF_1 = $40
Year 2: FCFF_2 = $55
Year 3: FCFF_3 = $70
Year 4: FCFF_4 = $85
Year 5: FCFF_5 = $100
•Other information:
The risk-free rate (rf) is 4%.
Equity risk premium or market premium(ERP) is 7%.
Beta (β) of the company is 1.5.
The corporate tax rate (T) is 30%.
The company's debt carries an interest rate of 8%.
Equity and debt are in equal proportion in the firm.
The terminal growth rate (g) is 4%.
Calculate the estimated value of the firm using the DCF model.
Data Analysis and Decision Making
ISBN: 978-0538476126
4th edition
Authors: Christian Albright, Wayne Winston, Christopher Zappe