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Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 40% of the company's present value, and you believe that at this capital structure the company's debt holders will demand a return of 4% and stockholders will require 8%. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 35%) will be $55 million and that investment expenditures will be $31 million. Thereafter, operating cash flows and investment expenditures are forecast to grow by 2% a year.
A) What is the total value of Icarus? total value in millions.
B) What is the value of the company's equity? Company's equit in millions.
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Use your finding in part a to discuss the effect of more frequent deposits and compounding of interest on the future value of an annuity.
Preston Industries has a WACC of 11.48 percent. The capital structure consists of 60.4 percent equity and 35.4 percent debt. The aftertax cost of debt is 5.9 percent and the cost of equity is 14.60 percent. What is the cost of preferred stock?
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