Suppose there are perfect capital markets with taxes. Investors expect Smith Inc. to have $120 earnings before interest and taxes in one year. This company has a 25% tax rate, $100 market value of debt, and 20 shares outstanding. This company’s net working capital, depreciation expense, and capital expenditures are all expected to be zero in perpetuity. Investors expect this company to have the same earnings before interest and taxes, market value of debt, tax rate, and number of shares outstanding in perpetuity. The firm’s unlevered cost of equity is 8% and its cost of debt is 5%. 

Based on this information, what amount would you expect this company’s share price to be ?

Answer rating: 100% (QA)

To calculate the expected share price of Smith Inc we can use the discounted cash flow DCF approach ... View the full answer