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TAX 40.00% D/E 75.00% PAYOUT RATE 100.00% RISK-FREE INTEREST RATE 8.00% MARKET PREMIUM 8.50% COMP.

CO DEBT 13945 EQUITY 7000 TAX RATE 36% DEBT BETA 0.3725 EQUITY BETA 1.8

Assignment 1. CAPM and WACC in valuation

BLAZER TELECOMs has perpetual earnings before interest and taxes 40%. BLAZER uses a debt-to-equity ratio of 0.75. Thedebt is priced to y BLAZER's depreciationexpenses are not tax deductible and just offset c changes in working capital are zero. BLAZER has a 100% payoutpolicy. The risk-free interest rate is 8% and the market premium (market rate dont know BLAZER's asset beta, but we believeComp Co.s assets hav know the followingabout Comp Co.: it debt value is $13,945, its market v rate is 36%, its debt beta is 0.3725, and its equity beta is 1.80. End of year 1 2

0 annual cash flows EBIT interest EBT Taxes NI Dep CAPEX Change in WC Avail cash flow Equity cash flow annual debt schedule Beginning debt Principal payments Debt terminal value estimates Firm Value Debt Equity annual discounting Debt/capital Equity/capital Asset beta All equity WACC Debt beta Equity beta Cost of equity Cost of debt WACC-cost of capital

$400.00 $400.00 $400.00 $400.00 60.19 60.19 60.19 60.19 339.81 339.81 339.81 339.81 135.92 135.92 135.92 135.92 203.89 203.89 203.89 203.89 0.00 0.00 0.00 240.00 240.00 240.00 240.00 240.00 240.00 240.00 240.00 752.36 752.36 752.36 752.36 752.36 752.36 752.36 752.36

Ch thch Asset beta= (EQUITY BETA+D RATE)*DEBT/EQUITY)/(1+(1 RATE)*DEBT/EQUITY)

1755.50 1755.50 1755.50 1755.50 752.36 752.36 752.36 752.36 1003.14 1003.14 1003.14 1003.14 0.4286 0.4286 0.4286 0.4286 0.5714 0.5714 0.5714 0.5714 0.999980408 0.99998 0.99998 0.99998 0.16500 0.16500 0.16500 0.16500 0.00 0.00 0.00 0.00 1.4500 1.4500 1.4500 1.4500 0.2032 0.2032 0.2032 0.2032 0.08 0.08 0.08 0.08 0.1367 0.1367 0.1367 0.1367

Debt capital =3/7 v equity capit Equity beta= asset beta*(1+(1 Debt beta= 0 do bi ni risk-free rate of interest Cost of equity= rF+market prem Cost of debt= rF+ market premiu All equity beta WACC= rF+ ma WACC= cost of debt* debt beta equity beta

Avail cash flow(OCF) Firm value=Avail cash flow/ WA Debt=3/7* firm value Equity=4/7* firm value Interest= Rf*debt

on

gs before interest and taxes of $400,the corporate tax rate is 0.75. Thedebt is priced to yield the risk-free rate of interest. deductible and just offset capital expenditures in eachyear, and R has a 100% payoutpolicy. rket premium (market rate less therisk-free rate) is 8.5%. We lieveComp Co.s assets have the same risk as BLAZER. We alue is $13,945, its market value of equity value is$7,000, its tax equity beta is 1.80.

(EQUITY BETA+DEBT BETA*(1-TAX DEBT/EQUITY)/(1+(1-TAX DEBT/EQUITY)

ital =3/7 v equity capital= 4/7 eta= asset beta*(1+(1-tax rates)*D/E) a= 0 do bi ni Thedebt is priced to yield the rate of interest quity= rF+market premium *equity beta ebt= rF+ market premium *debt beta y beta WACC= rF+ market premium*asset beta cost of debt* debt beta*(1-tax rate)+ cost of equity*

(OCF) = EBIT*(1- tax rate)+Dep (Dep=0) ue=Avail cash flow/ WACC 7* firm value /7* firm value