Higgs Bassoon Corp. borrowed heavily and is reducing its debt over the next 3 ye
ID: 2749558 • Letter: H
Question
Higgs Bassoon Corp. borrowed heavily and is reducing its debt over the next 3 years to a sustainable level. Higgs Bassoon has forecast free cash flows and the tax savings due to the deductibility of interest expense for the next three years, as shown below:
The FCF and tax savings are expected to grow at a constant rate of 5.9% after Year 3. The unlevered cost of equity is 11% and its tax rate is 31%. What is the horizon value of unlevered firm?
1 2 3 Free cash flow $1,000 $1,200 $1,350 Tax savings $320 $240 $160Explanation / Answer
The horizon value of unlevered firm after 3 year
= Free cash flow (1 + growth rate) / cost of equity - growth rate
= $1350 (1 + 0.059) / 0.11 - 0.059
= $1429.65 / 0.051
=$ 28032.35
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