Answer:
a) market value of equity 589,488,461.54
b) it can loan up to 212,500,000
c) as the liabilities provides a tax shield because, interest expense are tax deductible while dividends don't The companu find a tax incentive to take debt
Explanation:
Free Cash Flow for the firm:
17,000,000 earnings before taxes
- 7,000,000 CAPEX
+ 3,000,000 depreciation
<u>- 5,950,000</u> income tax*
7,050,000 FFCF
we solve using the gordon grow model:
7,050,000x1.087 / (0.10 - 0.087) = 589,488,461.54
<em>* </em>income tax:<em> </em>17,000,000 x 35% = 5,950,000
b) We can consider the income as the installment of a perpetuity
17,000,000 / 0.08 = 212,500,000