The "Talon" Corporation has a market value of equity of $20,000,000, and a market value of debt of $10,000,000. Further, it has 1,000,000 shares outstanding.

Assume the beta of the equity is 1.5 and YTM of existing debt of 3.5%. The market risk premium is 6%, and the risk-free rate is 2%. Assume the marginal tax rate is 30%.

As a financial analyst, you are projecting the financial statements based on your own private beliefs!

You estimate the FCFF for the next five years:

Year 1	$2,100,000
Year 2	$2,200,000
Year 3	$2,300,000
Year 4	$2,400,000
Year 5	$2,500,000

After year five the FCFF will increase at a constant rate of 2%, in line with inflation estimates. (This means Year 6 cash flows will be 2% greater than year 5 cash flows).

1) According to CAPM, what is the expected return on equity?

2) What is the D/E ratio for the firm?

3)  What is the WACC of the firm?

4) Given all this information, what is the value of the firm? (Hint: What is the PV of the FCFF)

5) The Talon Corporation is currently trading for $20.00 per share. According to your projections, the common equity is:

Group of answer choices

Undervalued

Overvalued

Fairly Valued

Cannot Be Determined

Answer rating: 100% (QA)

1 According to CAPM the expected Return on Equity is given by the following formula Expected Return ... View the full answer