Suppose a firm's operating cash flows is estimated to be $10 million, its fixed capital investment is at $2.5 million, and its investment in net working capital is currently at $1.0 million.

Its long-term debt is $100 million in total and the most recent debt issuance had the YTM of 4.5%. Its stock is currently trading at $50 a share with 2 million shares outstanding. Its beta is estimated to be 1.2; risk-free rate is 2% with the equity market premium of 5%.

Thefirm faces 30% tax rate.

(1) What is the value of the firm if you assume the firm's free cash flows will grow at 3% indefinitely?

(2) What is your estimate of a share price?

Answer rating: 100% (QA)

To calculate the value of the firm we can use the free cash flow to the firm FCFF approach The formu... View the full answer