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Question - A company 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%.
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).
Required - What is expected return on equity, according to CAPM? what is D/E ratio? What is the WACC? What is the PV of the company?
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