Normaltown Corporation
An analyst has predicted the free cash flows for Normaltown Corporation for the next four years:

-After 2007,the free cash flows are expected to grow at an annual rate of 5%.The weighted average cost of capital for Normaltown is 12%.If the market value of the firm's debt is $100 million,find the value of the firm's equity.

Question

Normaltown Corporation
An analyst has predicted the free cash flows for Normaltown Corporation for the next four years:
 
-After 2007,the free cash flows are expected to grow at an annual rate of 5%.The weighted average cost of capital for Normaltown is 12%.If the market value of the firm's debt is $100 million,find the value of the firm's equity.

Quizplus · Accepted Answer

Terminal value = $29*1.05/(.12-.05)= $435
PV of cash flows = $10/1.12 + $15/(1.12)^2 + $22/(1.12)^3 + $464/(1.12)^3 = $331.43
Equity value = $331.43 - $100

Normaltown Corporation An Analyst Has Predicted the Free Cash Flows for Normaltown