A firm has unlevered beta of 1.1, and now its debt to equity ratio is 0.4. What

Question

A firm has unlevered beta of 1.1, and now its debt to equity ratio is 0.4. What is the levered beta assuming the tax rate is 40%?

Using WACC to discount free cash flows, one gets the value of the firm. True or False?

Suppose beta is 1.2, risk free rate is 3%, market risk premium is 5%, before tax cost of debt is 6%, tax rate is 40%, and the firm's debt to equity ratio is 0.5, what is WACC?

A firm has EBIT of 100 million, depreciation of 15 million, tax rate of 40%, change in net working capital of 3 million, and capital expenditure of 20 million, what is the free cash flow?

Suppose this free cash flow grows at 3% per year forever, and the WACC is 8%, what is the firm value?

If this firm has outstanding debt of 150 million, what is the equity value of the firm?

Suppose a firm has free cash flow of equity 100 million per year indefinitely, and its cost of equity is 10%, what is the equity value of this firm?

If this firm has outstanding debt of 250 million, what is the firm value?

Explanation / Answer

Answer to Question 1:

Levered Beta = Unlevered Beta * [1 + (1 - tax) * (D/E Ratio)]
Levered Beta = 1.1 * [1 + (1 - 0.40) * 0.40]
Levered Beta = 1.1 * 1.24
Levered Beta = 1.36

Answer to Question 2:

True, the get the true value of the firm we need to discount free cash flows using WACC.

Answer to Question 3:

Cost of Equity = Risk-free Rate + beta * Market Risk Premium
Cost of Equity = 3% + 1.2 * 5%
Cost of Equity = 9.00%

WACC = Weight of Debt * Before-tax Cost of Debt * (1 - tax) + Weight of Equity * Cost of Equity
WACC = (0.5/1.5) * 6% * (1 - 0.40) + (1.0/1.5) * 9%
WACC = 7.20%

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