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A company has 1 million shares outstanding and a target capital structure of 30% debt. The...

A company has 1 million shares outstanding and a target capital structure of 30% debt. The company’s beta is 1.4, and it has $10.82 million in debt paying an 8% interest rate. The FCF for the current year is $2 million, and it is expected to grow at 5% annually. The company pays a 40% tax rate. The risk-free rate is 5%, and the market risk premium is 6%. What is the current total intrinsic value of the equity?

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Answer #1

Capital Asset pricing model:

As per CAPM model:
Ke= Rf+(Rm-Rf)B

Ke= required rate of return.
Rf= Risk-free rate.
Rm =Market Risk Premium.
B = Beta, systematic risk.

WACC (Kc)= WEIGHTED AVERAGE COST OF CAPITAL.  

It's the overall cost of raising funds for the firm. It is summation of the weighted average cost of capital of equity, preference, debt and retained earnings.

Intrinsic value of equity= $206.57 million.

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