You estimate that the free cash flows of a firm will be $5million, $8million, $12million and  $14million over the next four years.  You estimate (properly) that the cash flows will grow at 5%  thereafter (and you are comfortable with the steady-state year free cash flow).  You have calculated  the cost of equity capital = 15.5% and the pre-tax cost of debt capital = 7%.  The average tax rate is  20%, and the marginal tax rate is 40%.  The firm is currently operating with a D/E ratio of 1.5, and the  target D/E ratio is 0.80.  

Calculate the value of the firm.

Answer rating: 100% (QA)

The first step is to calculate the free cash flows of the firm for the next four years According to the given data the cash flows would be Year 1 5 mi... View the full answer