18: Suppose Kappa does not add leverage in 2024 and 2025 but instead keeps its debt fixed at 100$ million until 2026. How would this change in its leverage policy affect its expected free cash flow? How would it affect the free cash flow to equity? Solve the question from the table. Table 7.10 Spreadsheet Kappa's Free Cash Flow ForecastYear 202120232024202220252026Free Cash Flow ($ 000)1 Net Income5,1936,2476,9608,382 10,5452 Plus: After-Tax Interest Expense4,4204,4204,4205,0835,3043 Unlevered Net Income9,61310,66711,38013,46515,8494 Plus: Depreciation5 Less: Increases in NWC6 Less: Capital Expenditures7 Free Cash Flow of Firm8 Plus: Net Borrowing9 Less: After-Tax Interest Expense10 Free Cash Flow to Equity5,4503,4125,405(3,663)6,865(4,089)7,7107,678(4,685) (5,231)(5,000)13,475(5,000) (20,000) (15,000) (8,000)7,409(5,845)1,45810,32815,0005,000(4,420)(4,420)(4,420)(5,083) (5,304)9,0552,9894,7351,3755,024

Suppose Kappa does not add leverage in 2024 and 2025 but instead keeps its debt fixed at 100$ million until 2026. How would this change in its leverage policy affect its expected free cash flow? How would it affect the free cash flow to equity?

Suppose Kappa does not add leverage in 2024 and 2025 but instead keeps its debt fixed at 100$ million until 2026. How would this change in its leverage policy affect its expected free cash flow? How would it affect the free cash flow to equity?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section: Chapter Questions

Problem 23SP

See similar textbooks

Related questions

Q: 11. Suppose that the company currently has no debt and has an equity cost of capital of 12%. The…

A: Here, Equity cost of capital = 12% Cost of borrowing funds = 6% Debt ratio = 0.5 To Find: Levered…

Q: Assume BigData Inc. has no cash on hand, but wants to take on a project that adds $70 million in…

A: Capital structure decisions are made by financial managers. Optimal capital structure is decided by…

Q: 17. Zaman Pharmaceutical’s cost of debt is 9%. The risk–free rate of interest is 5%. The expected…

A: The cost of debt refers to the total interest rate paid by a company to raise funds through the…

Q: Consider the following data towards a firm's potential leverage. Assume that the firm can lever up…

A: Given:

Q: Gladstone Corporation is about to launch a new product. Depending on the success of the new product,…

A: As per our guidelines, we are supposed to answer only 3 sub parts ( if there are multiple sub parts…

Q: Wintermelon Corp.'s controller is considering a change in the capital structure consisting of 40%…

A: Cost of equity is the return required by the individual for equity investment or the return required…

Q: Milton Industries expects free cash flows of $4 million each year. Milton's corporate tax rate is…

A: As per MM Approch the Value of firm is calculated with the help of following formula 1.…

Q: Which of the following strategy enables a manager to report a higher current ratio? Select one: a.…

A: The current ratio is the ratio of the current assets to the current liabilities of the entity. By…

Q: Given the following information, how much value will leverage will add to, or subtract from, the…

A: Given information: Corporate tax is 15% Personal tax on debt is 30% Personal tax on equity is 10%

Q: Using PROBLEM 1, how much is the projected net income for 2022?

A: 1. A projected income statement depicts earnings and deficits for a certain future time, such as the…

Q: A firm plans to grow at an annual rate of at least 13%. Its return on equity is 21%. Suppose the…

Q: A firm is worth $50 or $180 with equal probability. Management wants to issue a bond that has a…

A: Required Return = Face Value ×(1 - cost of capital) we know, face value = 60 cost of…

Q: In a world with corporate taxes, the market value of a firm’s assets can increase through the…

A: Hi, since you have posted multiple questions, I will answer the first one as per the authoring…

Q: Which of the following is a source of short-term financing? Group of answer choices Issue New Stock…

A: Questions 21 As per Bartleby policy if there are multiple questions then we can do only 1st…

Q: 1a. Consider the statement that an asset with higher risk must earn higher risk premium. Is it true…

A: "An asset with higher risk must earn higher risk premium"- True (Reason- Higher risk assets includes…

Q: 7. Calculating Cost of Debt For the firm in Problem 6, suppose the book value of the debt issue is…

A: Market value refers to the price at which an item is sold on the open market, and it is also used to…

Q: Company needs ghc1000 to finance its activities. The firm can finance this expenditure either by…

A: Given Information: Funds required by the company for its activities - ghc1000 Finance can be done…

Q: The firm plans to increase its fixed assets by 15% in 2021 (from the 2020 level) from an increase in…

A: In this we have to calculate P/E ratio and return on equity of 2020 from that we get the forward…

Q: Heleveton Industries is 100% equity financed. Its current beta is 1.1. The expected market risk…

A: here we will use the Cost of capital formula to calculate the capital structure Cost of capital =…

Q: 13. An all-equity firm currently has 1,000,000 shares outstanding with a market price of $10. The…

A: Value of an unlevered firm When a firm has both equity and debt in its capital structure, it is…

Q: Your company doesn't face any taxes and has $755 million in assets, currently financed entirely with…

A: EPS (Earnings per share) is portion of total earnings that is due to each issued share of company.…

Q: DuPont analysis) Garwryk, Inc., which is financed with debt and equity, presently has a debt ratio…

A: Firms Equity Multiplier: Equity Multiplier and debt leverage have a direct relationship between…

Q: The Neal Company wants to estimate next year’s returnon equity (ROE) under different financial…

A: Debt to capital ratio is depicts the ratio of debt of the company to the total capital of the…

Q: LEX Corp. currently has a WACC of 23 percent. If the cost of debt capital for the firm is 11 percent…

A: Equity percent = 100% - debt percent = 100% - 40% = 60%

Q: Ch. 13. For questions 7, 8, and 9, use the following information: Consider a firm whose debt has a…

A: To arrange the funds for the business operations, firm issues various securities. Firm has to pay…

Q: A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either…

A: Workings:: A:: 100% equity financing Equity portion…

Q: 1. Calculate WACC of the company at current debt level. 2. Calculate expected price of BCL`s share…

A: 1. Formulation of WACC: Computation of WACC: Step 3 2. Formulation of expected share price:…

Q: KMS corporation has assets of $650 million, $65 million of which are cash. It has debt of $216.7…

A: A Leverage ratio is a ratio which shows how much capital is in the form of Debt.

Q: 2. Please work out the following financial ratios for Windswept, Inc. a) What is the days' sales in…

A: As multiple questions have been posted, as per the guidelines only the first three sub-parts will be…

Q: n DCF valuation, a company can increase its return on equity (ROE) by increasing its leverage ratio…

A: By capital asset pricing model, Return on equity = Risk free rate+Beta*Market risk premium If beta…

Q: 02) Overnight Publishing Company (OPC) has $2.5 million in excess cash. The firm plans to use this…

A: Dear Student, As per policy of Bartleby only 1 question can be answered if multiple questions with…

Q: QUESTION 1 The chairman of the world's largest asset manager said in his 2020 Annual Letter to…

A: The question is multiple choice question. Required Choose the Correct Option.

Q: 12 - Which of the following scenarios is the best? a) Decreasing ROE with decreasing EBITDA margin…

A: ROE - Return on equity EBITDA - Earnings before interest, taxes, depreciation, and amortization

Q: This question is related to Chapter 18 of Berk & Demarzo "Capital Budgeting and Valuation with…

A: With constant debt-equity ratioAdjusted Present Value is used to value a firm’s total investment by…

Q: 18- What sources of long-term capital do firms use? A. Long-term debt B. Preferred stock C. Common…

A: As you have asked multiple questions, we will solve the first question as per the policy of…

Q: 14. AT Steel currently has no debt and an equity cost of capital of 14%. Suppose that the company…

A: The weighted average cost of capital (WACC) : WACC is the combination of costs of a company from…

Q: Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is…

A: Given: Particulars Amount Free cash flows $14 Million Tax rate 21% Unlevered cost of…

Q: Wintermelon Corp.'s controller is considering a change in the capital structure consisting of 40%…

A: Beta is the measure of stock’s volatility in relation to the overall market.

Q: 470 -36 Assume that the dividend payout ratio will be 55 % when the rate on long term government…

A: The following information has been provided in the question: Dividend payout ratio =55 percent…

Q: In considering Modigliani & Miller’s (M&M) Propositions I and II in a world with no taxes and no…

A: Modigliani and Miller's (M&M) approach is a corporate finance approach which states that a…

Q: XYZ borrows $800 million at an interest rate of 7.6%. Prior to this borrowing, it was an all-equity…

A: Interest on bond = 800*7.6%=60.8 Tax Savings= 60.8*Tax rate = 60.8*37%…

Question

18: Suppose Kappa does not add leverage in 2024 and 2025 but instead keeps its debt fixed at 100$ million until 2026. How would this change in its leverage policy affect its expected free cash flow? How would it affect the free cash flow to equity?

Solve the question from the table.

Table 7.10 Spreadsheet Kappa's Free Cash Flow Forecast
Year 2021
2023
2024
2022
2025
2026
Free Cash Flow ($ 000)
1 Net Income
5,193
6,247
6,960
8,382 10,545
2 Plus: After-Tax Interest Expense
4,420
4,420
4,420
5,083
5,304
3 Unlevered Net Income
9,613
10,667
11,380
13,465
15,849
4 Plus: Depreciation
5 Less: Increases in NWC
6 Less: Capital Expenditures
7 Free Cash Flow of Firm
8 Plus: Net Borrowing
9 Less: After-Tax Interest Expense
10 Free Cash Flow to Equity
5,450
3,412
5,405
(3,663)
6,865
(4,089)
7,710
7,678
(4,685) (5,231)
(5,000)
13,475
(5,000) (20,000) (15,000) (8,000)
7,409
(5,845)
1,458
10,328
15,000
5,000
(4,420)
(4,420)
(4,420)
(5,083) (5,304)
9,055
2,989
4,735
1,375
5,024

Definition Definition Cash that is left over after a company has paid for its operating and capital expenses. Unlike net income or earnings, free cash flow excludes non-cash expenses of the income statement and includes the expenditures on equipment and assets. Free cash flow also helps potential shareholders to evaluate how quickly the company can pay interest and dividends.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Given:

VIEW

Solution:

VIEW

Step by step

Solved in 2 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

=NPV(B26,I27:R27)-B24 B26 = discount rate of 9% B24 = initial investment of $30m I27:R27 = yearly cash flows: what are the cash flows for each year?
year cash flow 1 1375 2 1495 3 1580 4 1630 If the discount rate is 8 percent, what is the future value of the cash flows in year 4? (show using financial calculator please)
Year Cash Flow 0 −$8,200 1 2,500 2 4,100 3 3,900 What is the profitability index for the cash flows if the relevant discount rate is 10 percent? A. 1.079 B. 1.100 C. 0.995 D. 1.016 E. 1.048 What is the profitability index for the cash flows if the relevant discount rate is 16 percent? A. 0.939 B. 0.967 C. 0.986 D. 0.892 E. 0.911 What is the profitability index for the cash flows if the relevant discount rate is 26 percent? A. 0.795 B. 0.819 C. 0.834 D. 0.755 E. 0.771
Year Cash Flow 0 –$ 17,700 1 10,000 2 8,900 3 5,400 a. What is the profitability index for the set of cash flows if the relevant discount rate is 11 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) b. What is the profitability index for the set of cash flows if the relevant discount rate is 16 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) c. What is the profitability index for the set of cash flows if the relevant discount rate is 23 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
Year Cash Flow 0 –$ 17,200 1 9,500 2 8,400 3 4,900 a. What is the profitability index for the set of cash flows if the relevant discount rate is 10 percent? b. What is the profitability index for the set of cash flows if the relevant discount rate is 15 percent? c. What is the profitability index for the set of cash flows if the relevant discount rate is 22 percent?
Year Cash Flow 0 −$ 9,300 1 5,700 2 3,000 3 4,800 a. What is the profitability index for the cash flows if the relevant discount rate is 10 percent? b. What is the profitability index for the cash flows if the relevant discount rate is 16 percent? c. What is the profitability index for the cash flows if the relevant discount rate is 24 percent?
Year Cash Flow ($) 0 17,700 1 10,000 2 8,900 3 5,400 What is the profitability index for the set of cash flows if the relevant discount rate is 11 percent? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
What is the present value of the following cash flow stream at a rate of 12.00%? Years: 0 1 2 3 4 CFs: $0 $75 $225 $0 $300 Select one: a. $511.28 b. $402.03 c. $546.24 d. $441.36 e. $436.99
Year Cash Flow 0 (8,100.00) 1 3,600.00 2 3,900.00 3 2,800.00 a. What is the profitability index for the cash flows if the relevant discount rate is 9 percent? b. What is the profitability index for the cash flows if the relevant discount rate is 14 percent? c. What is the profitability index for the cash flows if the relevant discount rate is 24 percent?
Year Cash inflow (R) 3 45 000 6 90 000 9 115 000 The applicable interest rate is 11,59% per year. The present value of the cash outflows is R95 000 The future value of the cash inflows is approximately [1] R326 950. [2] R271 470. [3] R169 330. [4] R218 000. [5] R250 000
Year Net Cash Flow Discount Factor Present Value (using the factor) Present Value (using Excel formula) 0 $ (3,500,000.00) 1 $ (3,500,000.00) ($3,500,000.00) 1 $ 900,000.00 0.90909 $ 818,181.00 $818,181.82 2 $ 900,000.00 0.82645 $ 743,805.00 $743,801.65 3 $ 900,000.00 0.75131 $ 676,179.00 $676,183.32 4 $ 900,000.00 0.68301 $ 614,709.00 $614,712.11 5 $ 900,000.00 0.62092 $ 558,828.00 $558,829.19 Net Present Value $ (88,298.00) $ (88,291.91) 3. Now assume that inflation is estimated as a 5% increase each year (starting with Year 1) for the entire 5 years. Calculate the new net cash flow values for each year. start with 5% increase for Year 1 net cash flow. Year Net Cash Flow 0 $…
39. Present and Future Values The present value of the following cash flow stream is $6,700 when discounted at 7.1 percent annually. What is the value of the missing cash flow? Year Cash Flow Years Cash flow 1 $1,40 2 ? 3 2,300 4 2,700