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How would you answer this question? Thank you.
Tom would like to value Automaton, Inc. using the discounted cash flow (DCF) method.
He forecasts Free Cash Flows (FCFs) of $135 million, $145 million, $146 million, respectively for years 1, 2, and 3. After year 3, he assumes FCFs will increase by 2 percent to perpetuity.
He gathers the information below (his "input variables") to compute Automaton's cost of equity, debt, and enterprise value.
Cost of Equity
Risk-Free-Rate = 3 percent
Beta = 1.03
Return of Market Portfolio (S&P 500) = 7 percent
Debt Financing
Debt to Equity Ratio = 45 percent
Market Value of Zero-Coupon Bonds = $100 million or 75 percent of par value
Maturity of Zero-Coupon Bonds = 15 years
Tax Rate = 35%
Based on the input variables, what is Automaton's after-tax cost of debt?.
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