Problem 4 (15 points) lota Enterprises expected to have free in the coming year

Question

Problem 4 (15 points) lota Enterprises expected to have free in the coming year of S8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Iota has an equity cost of capital of 13%, a debt cost of capital of 796, and it is in the 35% corporate tax bracket. (3 points) If Iota currently maintains a debt-to-equity ratio of 1, then its pre-tax WACC is closest to: (a) 1 1.0% (b) 10.5% (c) 10.0% d) 9.0% c (3 points) If lota currently maintains a debt-to-equity ratio of 1, then the value of lota as an all-equity firm would be closest to: a) $73 million o) S80 million (c) $115 million a S100 million o (3 points) If lota currently maintains a debt-to-equity ratio of 1, then lota's after-tax WACC is closest to: (a) 10.25% (b) 10.00% +9.50% (d) 8.75% (3 points) If lota currently maintains a debt-t of 1, then the value of lota as a levered firm is closest to: a)$114 million b) S100 million )$111 million (a) S140 million s (3 points) If lota currently maintains a debt-to-equity ratio of 1, then the value of lota's interest tax shield is closest to: a)$10 million ) S18 million (o)$11 million a) $24 million

Explanation / Answer

1) Pre Tax WACC = 13 * 0.5 + 7 * 0.5 = 10 %

Answer C

2) Value of all Equity Firm = 8 / ( 0.13 – 0.3) = $80

Answer B

3) Post Tax WACC = 13 * 0.5 + 7 * 0.65 * 0.5 = 8.75 %

Answer D

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