The following information is provided for the Delta Corporation (amounts are in millions):
-Refer to the information above. The expected return on the market is 11%, and the relevant risk-free rate is 6.5%. Delta's equity beta is 0.8, and the beta of its debt is 0.2. Cash flows are
Expected to grow indefinitely at 6% from 2011. Delta uses 1/3 debt financing and 2/3 equity
Financing. What is the fair market value of the firm? Round your answer to the nearest
Hundred thousand dollars.

Question

The following information is provided for the Delta Corporation (amounts are in millions): 
-Refer to the information above. The expected return on the market is 11%, and the relevant risk-free rate is 6.5%. Delta's equity beta is 0.8, and the beta of its debt is 0.2. Cash flows are
Expected to grow indefinitely at 6% from 2011. Delta uses 1/3 debt financing and 2/3 equity
Financing. What is the fair market value of the firm? Round your answer to the nearest
Hundred thousand dollars.

Quizplus · Accepted Answer

The fair market value of the firm can be calculated using the Weighted Average Cost of Capital (WACC) and the Gordon Growth Model. The WACC is calculated using the equity and debt betas, the market return, and the risk-free rate. The firm's cost of equity is 10.3% (6.5% + 0.8*(11%-6.5%)), and the cost of debt is 7.5% (6.5% + 0.2*(11%-6.5%)). The WACC is 9.37% (2/3*10.3% + 1/3*7.5%). Using the Gordon Growth Model, the value of the firm is calculated as the expected cash flow divided by the WACC minus the growth rate. Given the growth rate of 6%, the fair market value is approximately $94.1 million.

The Following Information Is Provided for the Delta Corporation (Amounts