Firm ABC’s projected cash flows are as follows Year 1 2 3 4 and 4+ CF 3,000 5,000 8,000 Grow at g = 1% forever We...

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Finance

Firm ABC’s projected cash flows are as follows
Year
1
2
3
4 and 4+
CF
3,000
5,000
8,000
Grow at g = 1% forever
We can choose one of the following two capital structureplans:
Debt
Equity
Plan A
20%
80%
Plan B
50%
50%
Plan C
70%
30%
The cost of debt are as follows
Debt
Cost of debt
Plan A
20%
risk-free rate + 0.5%
Plan B
50%
risk-free rate + 1%
Plan C
70%
risk-free rate + 3%
The firm’s unlevered beta is 0.8, tax rate is 40%. Market returnis 9%.
To calculate risk-free rate, we have the followinginformation.
The 10-year Treasury bond with par value $100, annual couponrate 3.125%, 10-year to maturity, is selling at $90.
What is the highest possible firm value?
a
117,613.91
b
121,494.40
c
139,027.85
d
129,035.03

Answer & Explanation Solved by verified expert

4.1 Ratings (736 Votes)

AnswerCorrect answer isd12903503ExplanationCalculation of risk free rateTreasury bond Par value 100Annual See Answer

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Transcribed Image Text

Firm ABC’s projected cash flows are as followsYear1234 and 4+CF3,0005,0008,000Grow at g = 1% foreverWe can choose one of the following two capital structureplans:DebtEquityPlan A20%80%Plan B50%50%Plan C70%30%The cost of debt are as followsDebtCost of debtPlan A20%risk-free rate + 0.5%Plan B50%risk-free rate + 1%Plan C70%risk-free rate + 3%The firm’s unlevered beta is 0.8, tax rate is 40%. Market returnis 9%.To calculate risk-free rate, we have the followinginformation.The 10-year Treasury bond with par value $100, annual couponrate 3.125%, 10-year to maturity, is selling at $90.What is the highest possible firm value?a117,613.91b121,494.40c139,027.85d129,035.03

Year	1	2	3	4 and 4+
CF	3,000	5,000	8,000	Grow at g = 1% forever

	Debt	Cost of debt
Plan A	20%	risk-free rate + 0.5%
Plan B	50%	risk-free rate + 1%
Plan C	70%	risk-free rate + 3%