The free cash flow to the firm is reported as $205 million.The interest expense to the firm is $22 million.If the tax rate is 35% and the net debt of the firm increased by $25,what is the market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?

Question

Quizplus · Accepted Answer

First, we need to calculate the Free Cash Flow to Equity (FCFE) using the Free Cash Flow to the Firm (FCFF):

FCFE = FCFF - Interest Expense (1 - Tax Rate) + Net Borrowing
FCFE = $205M - $22M(1 - 0.35) + $25M
FCFE = $149.75M

Next, we can use the Gordon Growth Model to calculate the market value of the firm:

Market Value = FCFE / (Cost of Equity - Growth Rate)
Market Value = $149.75M / (0.11 - 0.02)
Market Value = $1.4975B / 0.09
Market Value = $16.6389B

Finally, we need to add the net debt to get the enterprise value:

Enterprise Value = Market Value + Net Debt
Enterprise Value = $16.6389B + $25M
Enterprise Value = $2.397B

Therefore, the best choice is B, $2.397 billion.

The Free Cash Flow to the Firm Is Reported as $205