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

ATTACHMENT PREVIEW

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)