The Free Cash Flow-to-Equity (FCFE)for the acquisition in year 1 is closest to:
A)$4.7 million
B)$6.5 million
C)$8.3 million
D)$6.8 million

Question

Quizplus · Accepted Answer

A)In one year the interest on the debt will be 6% × $50 = $3 million.Because Rose maintains a constant debt-equity ratio,the debt associated with the acquisition is also expected to grow at a 3% rate,so D₁ = D₀₍1 + g)= $50(1.03)= $51.5 million,therefore the net borrowing (lending)is $51.5 - 50 = $1.5 million FCFE₁ = FCF from project - after tax interest payments + new borrowing FCFE₁ = +5.0 - (1 - .40)(3)+ 1.5 = $4.7 million

The Free Cash Flow-To-Equity (FCFE)for the Acquisition in Year 1