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Assumptions
Pretax operating income 300000
Annual change in working capital 20000
Capital spending over depreciation 15000
Tax Rate 40%
Growth Rate last 5 years 4%
Growth rate beyond second year 6% Cost of equity
10 year bond rate (Risk free rate) 5% Post tax cost of debt
Equity-risk premium 5.50% WACC
Business specific risk 6%
Liquidity-risk premium 15%
Value of control premium 10%
Pretax cost of borrowing 7%
Beta 2.0
Debt to equity ratio 1.5
Target debt to equity ratio 1
Years 1 2 3
Revenue 312,000.00 324,480.00 343,948.80
Tax 124,800.00 129,792.00 137,579.52
Change in Working Capital 20,800.00 21,632.00 22,929.92
Capital Spending 15,600.00 16,224.00 17,197.44
Answers
st of equity 17%
st tax cost of debt 4.2%
10.60%
4 5 6
364,585.73 386,460.87 409,648.52
145,834.29 154,584.35 163,859.41
24,305.72 25,764.06 27,309.90
18,229.29 19,323.04 20,482.43