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
A
Explanation: 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
You might also like to view...
Brenda’s ability to complete activities efficiently and effectively with and through other people is known as _______
a. delegation b. leadership c. entrepreneurship d. management
Which of the following determine what sales volume must be reached for a product before the company's total costs equal total revenue and no profits are earned?
a. price equilibrium analyses b. break-even analyses c. marginal revenue estimates d. marginal costs of goods sold