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Homework answers / question archive / Your company keeps a constant debt-to-equity ratio policy, maintaining a constant debt-tovalue ratio of 50%
Your company keeps a constant debt-to-equity ratio policy, maintaining a constant debt-tovalue ratio of 50%. The company has a three year residual life, and the unlevered cash flow from assets are reported below:
Year 1 2 3 Unlevered Cash Flow
350,000 450,000 675,000
The expected return on debt is 4.70% and the return on levered equity is 14.56%. The tax rate on corporate earnings is 32%. a) Compute the value of equity at the beginning of each of the three years of residual life, using the WACC method. [10 Points] b) Compute the value of the levered assets using the APV (Adjusted Present Value) method.
