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What is the market value of the firm expected fcf

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Reference no: EM132908129

Consider a firm, HGT Inc., that will produce free cash flows one year from today, and no subsequent cash flows. The free cash flows one year from today will be $90,000 if the economy is weak and $117,000 if the economy is strong. Each outcome is equally likely. The firm is currently financed with 100% equity with a beta of 1.0. Suppose the firm is considering issuing $90,000 in debt and using the proceeds to repurchase equity. That is, the firm will promise to pay $90,000 in one year to debt holders in exchange for cash now. The cash will paid to the equity holders immediately. The risk-free rate is 5%, and market risk premium is 4%. Assume that the Modigliani-Miller assumptions hold and that the CAPM is true.

a. What is the expected return on debt?

b. What is the market value of the firm's expected FCF before the debt issuance?

c. What is the market value of equity before the debt issuance?

d. What is the market value of equity after the debt issuance?

e. What is the beta of the equity after issuing the debt?

f. What is the discount rate on equity after issuing the debt?

g. Using the expected returns on equity and debt, compute the WACC of the firm after the debt issuance.

Reference no: EM132908129

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