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Estimate the value of the firm

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Question - Carmona Inc. is a firm with no debt, with expected free cash flows to the firm of $10 million next year growing at 2% a year in perpetuity. The firm has no cash and its current market capitalization is $200 million. Assuming that the company is correctly priced right now, estimate the value of the firm if it decides to borrow money at 4% (pre-tax) and move to a debt to capital (D/ (D+E)) ratio of 20%. (You can assume that the risk free rate is 3%, the equity risk premium is 5%, and that the tax rate for all firms is 40%).

Reference no: EM133179377

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