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  3. in this question we attempt to value a company (ra

In this question we attempt to value a company (rather than a project) using the...

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Accounting

In this question we attempt to value a company (rather than a project) using the valuation technique we have learned so far. Specifically, the company is expected to generate the following cash flows for the next 5 years:

Years

1

2

3

4

5

Free Cash Flows ($M)

15

18

20

22

23

After year 5, the company's cash flows are expected to grow at a constant rate of 5% forever.

Beta of the company's stock is 1.2. The expected return of the S&P 500 Index is 12.5%. The T-bill rate is 3.5%.

  1. Suppose that the company is financed with 100% equity. What is the value of the company today (t=0)?
  2. Suppose the company is financed with 50% debt and 50% equity. The company's bonds currently trade at par and pay 7% coupons. The corporate tax rate for the company is 21%. What is the value of the company today (t=0)?

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