45. Your firm buys another firm for vertically integration. The initial FCF’s are 1 million per...

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45. Your firm buys another firm forvertically integration. The initial FCF’s are 1 million per yearstarting the year and expected to grow at 3% per year. To yoursurprise, the actual FCF’s turn out to be 1.2 million per yearstarting this year with the same growth rate. How much did youunderpay from your original analysis assuming the WACC is 9%.
3.6 million
3.4 million
2.8 million
3.3 million
46. Answer the following true/false statements:
a. T/F For question 45, If they used the same amount of debt tobuy the firm, the debt to ebitda ratio should decrease when thehigher FCF’s were realized
b. T/F As the risk free rate goes up values of stocks and bondsshould go down as the required returns will increase (assumedividends and FCF’s and growth remain constant)
c. T/F If I feel the future cash flows of stock andbonds is more secure. The value of each will decrease
d. T/F Preferred stock gets paid out in a chapter 11 afterstocks

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4.2 Ratings (560 Votes)

Answer 45 Correct answer is b 34 million Explanation Value of firm FCF next year WACC Constant growth rate Assuming current year FCF 1 million Value of firm 1 1 3 9 3 1717 million See Answer

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45. Your firm buys another firm forvertically integration. The initial FCF’s are 1 million per yearstarting the year and expected to grow at 3% per year. To yoursurprise, the actual FCF’s turn out to be 1.2 million per yearstarting this year with the same growth rate. How much did youunderpay from your original analysis assuming the WACC is 9%.3.6 million3.4 million2.8 million3.3 million46. Answer the following true/false statements:a. T/F For question 45, If they used the same amount of debt tobuy the firm, the debt to ebitda ratio should decrease when thehigher FCF’s were realizedb. T/F As the risk free rate goes up values of stocks and bondsshould go down as the required returns will increase (assumedividends and FCF’s and growth remain constant)c. T/F If I feel the future cash flows of stock andbonds is more secure. The value of each will decreased. T/F Preferred stock gets paid out in a chapter 11 afterstocks