What is the value of the following firm where: • free net cash flows are expected to be a constant £3m per year to infinity;
• cost of debt capital after tax is 6 per cent per annum;
• the cost of equity capital is 14 per cent per annum;
• half the firm's capital is debt and half is equity (market values)?
A) £40m
B) £25m
C) £30m
D) £35m

Question

Quizplus · Accepted Answer

Firstly, we need to calculate the weighted average cost of capital (WACC) which is ((0.5 x 6%) + (0.5 x 14%)) = 10%.
To calculate the firm value, we use the constant free cash flow equation: 
Firm value = Free cash flow / WACC.
Therefore, the firm value = £3m / 10% = £30m. 
Thus, the answer is C.

What Is the Value of the Following Firm Where: •