1. Gupta Corporation is undergoing a restructuring, and its free cash flows are
ID: 2710096 • Letter: 1
Question
1. Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $45.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%, what is the horizon (or terminal) value (in millions) at t = 5? a.837, b854, c.1080, d.871, e.941 Answer: A? 2. Based on the corporate valuation model, Wang Inc.'s value of operations is $550 million. Its balance sheet shows $100 million notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions? a.228, b.250, c.213, d.235, e.188 Answer: B? 3. Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $950 and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation? a.4.81 %, b.4.49%, c.431%, d.5.48%, e. 5.30% Answer: B?Explanation / Answer
A is incorrect.
FCF5 = 45 million
G= 6.5%
Ko= 12%
Horizon value = FCF5 x(1+g)/ (Ko-g)
= 45 million x(1+0.065)/(0.12-0.065)
= 47.925/0.055
= 871 million
Therefore, option d is correct.
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