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Schwarzentraub Corporation’s expected free cash flow for the year is $500,000; in the future, free cash flow is expected to grow at a rate of 9%. The company currently has no debt, and its cost of equity is 13%. Its tax rate is 40%. Use the compressed adjusted value approach to answer the following questions. a. Find VU. b. Find VL and rsL if Schwarzentraub uses $5 million in debt with a cost of 7%. Use the APV model that allows for growth. c. Based on VU from Part a, find VL and rsL using the MM model (with taxes) if Schwarzentraub uses $5 million in 7% debt. d. Explain the difference between your answers to Parts b and c. Schwarzentraub Corporation s expected free cash flow for the year is

Intermediate Financial Management (MindTap Course List)

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 8P

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Schwarzentraub Corporation’s expected free cash flow for the year is $500,000; in the future, free cash flow is expected to grow at a rate of 9%. The company currently has no debt, and its cost of equity is 13%. Its tax rate is 40%. Use the compressed adjusted value approach to answer the following questions.

a. Find VU.

b. Find VL and rsL if Schwarzentraub uses $5 million in debt with a cost of 7%. Use the APV model that allows for growth.

c. Based on VU from Part a, find VL and rsL using the MM model (with taxes) if Schwarzentraub uses $5 million in 7% debt.

d. Explain the difference between your answers to Parts b and c.

Schwarzentraub Corporation s expected free cash flow for the year is

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