Solutions recently ( at the beginning of year 1 ) forecasted first year sales of $ 9.4
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Question:
Solutions recently ( at the beginning of year 1 ) forecasted first year sales of $ 9.4 million , operating costs other than depreciation of $ 5.6 million , and depreciation of $ 0.6 million . The company has no amortization charges , it has $ 4.2 million of eq outstanding bonds that carry a 6.5 % interest rate , and its income tax rate is 28 % . In order to sustain its operations and thus generate sales and cash flows in the future , the firm is required to make $ 1,3 million of capital expenditures on new fixed assets 7 and to invest $ 0.3 million in net working capital .
- a) Assuming that the firm's FCF will grow at a rate of 3 % forever after Year 1 , and also that its WACC is 20.0 % , estimate the market value of the firm and its debt ratio ( Debt / Firm Value ) at the beginning of year 1
- b) If the company keeps the debt level unchanged in the future , estimate its debt ratie the beginning of year 2 , and beginning of year 3 .
- c) Discuss the potential problem when using the WACC method to answer parts a) and b) above .
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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