1) An un-levered firm, Toronto Make Believes Ltd. has EBIT of $500,000 which it expects it will earn everlasting and it pays all of its earnings as dividends to shareholders (that is., no growth). Toronto Make Believes Ltd. has= 100,000 shares outstanding and there are no taxes. All debt will have coupon interest of 6%. You observe in market that government T-bills are being sold to yield 4% and market risk premium is 5%.
a) Compute the required rate of return for shareholders of this un-levered firm. Beta of unlevered firm is 1.2
2) By using income statements, start to construct the cash flow. Hint: For most part, cash flows are pretty straight forward. If you are going to experience trouble, it almost always occurs with working capital. Keep in mind that once you have computed Total Working Capital for Year 0, all future Working Capital requires will be incremental. Almost all of variables will be given to you here.