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Tin Roof's net cash flows for the next three years are projected at $72,000, $78,000, and $84,000, respectively. After that, the cash flows are expected to increase by 3.2 percent annually. The aftertax cost of debt is 6.2 percent and the cost of equity is 11.4 percent. What is the value of the firm if it is financed with 40 percent debt and 60 percent equity

Sagot :

Answer: $1282620.4

Explanation:

First, we'll calculate the weighted average cost of capital which will be:

= (Weight of debt × After cost of debt) + (Weight of equity × Cost of equity)

= (40% × 6.2%) + (60% × 11.4%)

= (0.4 × 0.062) + (0.6 × 0.114)

= 0.0248 + 0.0684

= 2.48% + 6.84%

= 9.32%

The present value calculated is $195424.56 (Check attachment)

Then, the terminal value for cash flow will be $1084195.40 (Check attachment)

Then, the value of the firm will be:

= Present value of cash flow + Terminal value for cash flow

= $195424.56 + $1084195.40

= $1282620.4

Therefore, the value of the firm is $1282620.40.

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