Question

GreenRiver Inc. has a leverage ratio of 30%. It generates FCF = $1,000 every year. The cost of debt is rd = 5%, the cost of equity is re = 10%. Calculate WACC and the firm value. Assume the corporate tax rate is TC = 40%.

Answer 1

WACC = 0.079 and firm value = 12,658.23.

Step-by-step explanation:

WACC is equal to

`Debt.cost*debt.weight*(1-tax.rate) + Equity.cost*equity.weight`

Where debt cost is 0.05, debt weight is 0.3, tax rate is 0.4, equity cost is 0.1 and equity weight is 1-0.3 = 0.7

So, WACC = 0.05*0.3*0.6 + 0.1*0.7 = 0.079 or 7.9%.

The value of the fir is calculated FCF/WACC, in this case 1,000/0.079 = 12,658.23.