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Finance Oct 15, 2020

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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