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In year 1, AMC will earn $2,000 before interest and taxes. The market expects these earnings to grow at a rate of 3.0% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 40%. Right now, the firm has $5,000 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 3.0% per year. Suppose the risk-free rate equals 5%, and the expected return on the market equals 11%. The asset beta for this industry is 1.11. a. If AMC were an all-equity (unlevered) firm, what would its market value be? b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 3.0% per year, at what rate are its interest payments expected to grow? c. Even though AMC's debt is riskless (the firm will not default), the future growth of AMC's debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC's assets, what is the present value of AMC's interest tax shield? d. Using the APV method, what is AMC's total market value, VL? What is the market value of AMC's equity? e. What is AMC's WACC? (Hint: Work backward from the FCF and V.) f. Using the WACC, what is the expected return for AMC equity? E D g. Show that the following holds for AMC: BA D+EBE+D+EBD h. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow? Use that information plus your answer to part (f) to derive the market value of equity using the FTE method. a. If AMC were an all-equity (unlevered) firm, what would its market value be? = If AMC were an all-equity (unlevered) firm, its market value would be $ (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 3.0% per year, at what rate are its interest payments expected to grow? Assuming the debt is fairly priced, the amount of interest AMC will pay next year is $ (Round to the nearest cent.) If AMC's debt is expected to grow by 3.0% per year, the rate its interest payments are expected to grow is %. (Round to one decimal place.) c. Even though AMC's debt is riskless (the firm will not default), the future growth of AMC's debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC's assets, what is the present value of AMC's interest tax shield? The present value of AMC's interest tax shield is $ . (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) d. Using the APV method, what is AMC's total market value, VL? What is the market value of AMC's equity? AMC's total market value, (V) is $ (Round to the nearest cent.) The market value of AMC's equity is $ (Round to the nearest cent.) e. What is AMC's WACC? (Hint: Work backward from the FCF and V.) AMC'S WACC is %. (Round to two decimal places.) f. Using the WACC, what is the expected return for AMC equity? The expected return for AMC equity is %. (Hold all intermediate calculations to at least 5 decimal places and round to one decimal place.) E D g. Show that the following holds for AMC: BA = D+EBE + D+EBD. (Select the best choice below.) (Note: small differences might arise due to rounding.) O A. With a Be of 1.667, the BA is 1.11, which equals the asset beta for AMC's industry. B. With a Be of 1.11, which equals the asset beta for AMC's industry, the BA is 1.667. C. With a Bp of 1.667, the BA is 1.11, which equals the asset beta for AMC's industry. D. With a Bo of 1.11, which equals the asset beta for AMC's industry, the BA is 1.667. h. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow? Use that information plus your answer to part (f) to derive the market value of equity using the FTE method. Equity holders expect to receive $ (Round to the nearest cent.) The rate cash flows are expected to grow is %. (Round to one decimal place.) The market value of equity is $ (Round to the nearest cent.) In year 1, AMC will earn $2,000 before interest and taxes. The market expects these earnings to grow at a rate of 3.0% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 40%. Right now, the firm has $5,000 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 3.0% per year. Suppose the risk-free rate equals 5%, and the expected return on the market equals 11%. The asset beta for this industry is 1.11. a. If AMC were an all-equity (unlevered) firm, what would its market value be? b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 3.0% per year, at what rate are its interest payments expected to grow? c. Even though AMC's debt is riskless (the firm will not default), the future growth of AMC's debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC's assets, what is the present value of AMC's interest tax shield? d. Using the APV method, what is AMC's total market value, VL? What is the market value of AMC's equity? e. What is AMC's WACC? (Hint: Work backward from the FCF and V.) f. Using the WACC, what is the expected return for AMC equity? E D g. Show that the following holds for AMC: BA D+EBE+D+EBD h. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow? Use that information plus your answer to part (f) to derive the market value of equity using the FTE method. a. If AMC were an all-equity (unlevered) firm, what would its market value be? = If AMC were an all-equity (unlevered) firm, its market value would be $ (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 3.0% per year, at what rate are its interest payments expected to grow? Assuming the debt is fairly priced, the amount of interest AMC will pay next year is $ (Round to the nearest cent.) If AMC's debt is expected to grow by 3.0% per year, the rate its interest payments are expected to grow is %. (Round to one decimal place.) c. Even though AMC's debt is riskless (the firm will not default), the future growth of AMC's debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC's assets, what is the present value of AMC's interest tax shield? The present value of AMC's interest tax shield is $ . (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) d. Using the APV method, what is AMC's total market value, VL? What is the market value of AMC's equity? AMC's total market value, (V) is $ (Round to the nearest cent.) The market value of AMC's equity is $ (Round to the nearest cent.) e. What is AMC's WACC? (Hint: Work backward from the FCF and V.) AMC'S WACC is %. (Round to two decimal places.) f. Using the WACC, what is the expected return for AMC equity? The expected return for AMC equity is %. (Hold all intermediate calculations to at least 5 decimal places and round to one decimal place.) E D g. Show that the following holds for AMC: BA = D+EBE + D+EBD. (Select the best choice below.) (Note: small differences might arise due to rounding.) O A. With a Be of 1.667, the BA is 1.11, which equals the asset beta for AMC's industry. B. With a Be of 1.11, which equals the asset beta for AMC's industry, the BA is 1.667. C. With a Bp of 1.667, the BA is 1.11, which equals the asset beta for AMC's industry. D. With a Bo of 1.11, which equals the asset beta for AMC's industry, the BA is 1.667. h. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow? Use that information plus your answer to part (f) to derive the market value of equity using the FTE method. Equity holders expect to receive $ (Round to the nearest cent.) The rate cash flows are expected to grow is %. (Round to one decimal place.) The market value of equity is $ (Round to the nearest cent.)

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