Tono Hotels reported earnings of 400 million before interest and taxes in the most recent year and
Question:
Tono Hotels reported earnings of 400 million before interest and taxes in the most recent year and paid 40% of its taxable income in taxes. The book value of capital at the firm is 2,400 million and the firm expects to grow 4% a year in perpetuity. The firm has a beta of 1.2, pretax cost of debt of 6%, equity with a market value of 2,000 million and debt with a market value of 1,000 million. The risk-free rate of interest is 5%, and the market risk premium if 5.5%.
a) Use the free cash flow to the firm-method to value this firm.
b) If you were told the probability of default at this firm at its current debt level is 10% and that the cost of bankruptcy is 25% of unlevered firm value, estimate the value of the firm using the adjusted present value approach.
Financial Accounting and Reporting a Global Perspective
ISBN: 978-1408076866
4th edition
Authors: Michel Lebas, Herve Stolowy, Yuan Ding