1. "A firm pays dividends of $5 million once annually. Analysts expect the dividends to remain at this amount indefinitely. The cost of equity is 14%. a. Calculate the value of the firm. b. Ana

1. “A firm pays dividends of $5 million once annually. Analysts expect the dividends to remain at this amount indefinitely. The cost of equity is 14%.

a. Calculate the value of the firm.

b. Analysts now expect that dividends will grow annually by 3%. Calculate the firm value.”

2. A firm has expected free cash flows to the firm of $12 million annually which are expected to grow at 3.5% each year. It uses both debt and equity. The cost of equity is 13% and the after-tax cost of debt is 7.5%. The debt to asset ratio is 40%. Calculate the value of the firm.

3. “A firm has the projected cash flows as indicated below.

a. Assuming the Year 5 free cash flow amount is expected to grow at 3% annually indefinitely and the firm has a Weighted Average Cost of Capital (WACC) of 9.8% calculate the firm value.

b. If the market value of the debt is $170 million what is the value of equity?”

Year “Free Cash Flow to Firm

($ in millions)”

0 $25

1 $30

2 $33

3 $35

4 $37

5 $38

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Rasmussen College – BUS 330 – Week 10 Assignment

Maximum Points:

30

1.

2.

3.

Year

0

$25

1

$30

2

$33

3

$35

4

$37

5

$38

A firm pays dividends of $5 million once annually.

Analysts expect the dividends to remain at this amount indefinitely.

The

cost of equity is 14%.

a. Calculate the value of the firm.

b.

Analysts now expect that dividends will grow annually by 3%.

Calculate the firm value.

A firm has expected free cash flows to the firm of $12 million annually which are expected to grow at 3.5% each year.

It uses

both debt and equity.

The cost of equity is 13% and the after-tax cost of debt is 7.5%.

The debt to asset ratio is 40%.

Calculate the value of the firm.

A firm has the projected cash flows as indicated below.

a. Assuming the Year 5 free cash flow amount is expected to grow at 3% annually indefinitely and the firm has a Weighted

Average Cost of Capital (WACC) of 9.8% calculate the firm value.

b. If the market value of the debt is $170 million what is the value of equity?

Free Cash Flow

to Firm

($ in millions)