Al's Market plans to close after 3 more years.The firm expects to have free cash flows of $148,000 next year,$128,000 in Year 2,and $65,000 in Year 3 after incurring the costs of closing.The firm's cost of equity is 15.5% and its after-tax cost of debt is 6.2%.What is the present value of the firm if its debt to value ratio is 30%?

Question

Quizplus · Accepted Answer

WACC = 0.3(6.2%) + (1 − 0.3)(15.5%) = 12.71%PV = $148,000 / 1.1271 + $128,000 / 1.1271² + $65,000 / 1.1271³ = $277,467

Al's Market Plans to Close After 3 More Years