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1) ABC Corp is expected to have free cash flows of $120 million at the end of the year that will grow at 1% in perpetuity
1) ABC Corp is expected to have free cash flows of $120 million at the end of the year that will grow at 1% in perpetuity. ABC's current WACC is 9.8% and its unlevered cost of capital is 13.7%. Given this information calculate the present value of all future tax shields for ABC corp.
2) What monthly lease payment due in advance should be charged for a tract of land valued at $41,000 if the agreed interest is 9.58?% compounded semi-annually??
Expert Solution
1) Computation of the present value of all future tax shield:-
Value of firm if all equity financed = FCF / (unlevered cost of capital - Growth rate)
= 120 / (13.7% - 1%)
= 120 / 12.7%
= 944.88 million
Total value of firm = FCF / (WACC - Growth rate)
= 120 / (9.8% - 1%)
= 120 / 8.8%
= 1363.64 million
PV of tax shields = Total value of the firm - Value of firm if all equity financed
= 1363.64 - 944.88
= $418.75 million
2) Computation of the monthly lease payment:-
FV = PV*(1+rate)^n
Here,
Rate = 9.58%/2 = 4.79% (semiannual)
n = 2*(1/12) = 2*0.083333 = 0.166667 periods (semiannual)
FV = PV*(1+rate)^n
$41,000 = PV*(1+0.4.79%)^0.166667
PV = $41,000/1.007829
= $40,681.52 Or $40,682
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