is a real pain in azz right ?? but i love you guys and when i graduate i give a chocho too all of youuu in our financial sense is like paying all earnings as dividends no money left to invest in future but trust me i\ll do it !! So, Flag enterprises is expected to have a free cash flow in the coming year $8 million and this free cash flow is expected to grow at an annual rate of 3% , thereafter in the foreseeable future. Flag has an equity cost of capital of 13% , a (pre-tax) cost of debt 7% and it is in the 35% tax bracket , IF flag maitains .05 debt-to-equity ratio then the value of flag as a levered company is ???
sunny… you post some crazy questions.
supersunny, now’s a good time to share with us the source of the questions you’ve been posting today. 1) While equity valuation using FCF is calculated similarly to DDM, this is LII material. 2) Similarly, the pure-play levered/unlevered beta question you posted earlier is LII material Moreover, it would be helpful if this question specified whether the FCF was Free Cash Flow to Equity (FCFE) for Free Cash Flow to the Firm (FCFF), as the former is discounted at Ke and the latter is discounted at WACC. My understanding is that the D/E is irrelevant to equity valuation using discounted FCF.
u really got me sweat hiredguns1 by showing me this LII thingy its my 3rd course ever in finance … i wonder thats why alot of students fail in our school…but if in case i fail iwill suicide…but this is the same question as iit was given in one of our previous exam
I am not too sure if my answer is correct, but applying what I have learnt in school…Weird, why is Capital Structure in L1? Did thte syllabus change or something!!! Definition of symbols: Rsu= unlevered cost of equity. VL=Value of levered firm Vu=value of unlevered firm First: When there is growth in the firm, the value of the unlevered firm is given by: FCF/(Rsu-g)=$8million/(0.13-0.03)=$80 million But then, there is a slight problem, because there is no indication on the amount of debt used by the company. I am not sure if u can acty use the D/E ratio (my guess is that it is a red herring), but from the text I was using, they gave an actual number, say $5million and that really helped. Anyways, just as an illustration, let’s just assume that the company issused $5m worth of bonds. Going by the MM model, VL=VU+TD=80m+0.35(5million)=$81.75million But, there is also this growth model that u can use, and VL=VU+[(Cost of debt*TD)/(Rsu-g)] =80m+[(0.07*0.35*5million)/(0.1)]=$81.225million. It’ll be really helpful if u posted more dettails, like what was the answer and explanation for it…Cos as a matter of fact, there are 2 ways to get abt doing this question from what I understand. MM basically assumes 0 growth and theoretically speaking, the value of the company is supposed to be larger under the growth model, but it seems that because the growth rate here is too low, the value of the tax shield in the MM model is larger thtan the value of the tax shield under the growth mdoel. Here is my 0.02 on this. It does look a bit weird.
that i am sure that we are discounting it by WACC and the Wacc i get is .08775 and the growth rate is 3% when i discount them i dont get the right answer which is $111 million
I was assuming a debt amount of $5million. I am not too sure what exactly is the amount of debt in the company. I am not sure why shld it be discounted by WACC as what was mentioned earlier, if it is FCFE, it should not be discounted at Wacc but at the cost of equity alone