The Free Cash Flow to the Firm (Fcff) Accounting Assignment Help

Assignment Task

 Question 

• You have the following information on a company on which to base your calculations and discussion:
• Cost of equity capital (rE) = 18.55%
• Cost of debt (rD) = 7.85%
• Expected market premium (rM –rF) = 8.35%
• Risk-free rate (rF) = 5.95%
• Inflation = 0%
• Corporate tax rate (TC) = 35%
• Current long-term and target debt-equity ratio (D:E) = 2:5
• a. What are the equity beta (bE) and debt beta (bD) of the firm described above?
• [Hint: Assume that the above costs of capital have been generated by an appropriate equilibrium model.]
• b. What is the weighted-average cost of capital (WACC) for this firm at the current debt-equity ratio?
• c. What would the company’s cost of equity capital become if you unlevered the capital structure (i.e. reduced gearing until there is no debt)?

Question 2
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projections:
 
Year 0 1 2 3

• Sales (Revenues)   100,000 100,000 100,000
•  Cost of Goods Sold (50% of Sales)   50,000 50,000 50,000
•  Depreciation   30,000 30,000 30,000
•  EBIT   20,000 20,000 20,000
•  Taxes (35%)   7000 7000 7000
•  unlevered net income   13,000 13,000 13,000
•  Depreciation   30,000 30,000 30,000
•  changes to working capital   5,000 5,000 -10,000
•  capital expenditures -90,000      

 
Q- What is the free cash flow to the firm (FCFF) for the first year of Epiphany’s project?

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