FCF and Hamada’s Equation

Johnson Corporation’s Free Cash Flow for the current year (FCF0) is $22.5MM.

Johnson Corporation is expecting growth for next year (FCF1) to be 20%, and growth of 12.5% (FCF2) for the following year. Year 3 (FCF3) is expected to have a growth rate of 9%. Year 4 (FCF4) is expected to be 7%. After year 4, Free Cash Flow is expected to grow at constant rate of 3% .

Assuming a WACC of 8.75%, calculate the following:

a. FCF1

b. FCF2

c. FCF3

d. FCF4

e. Calculate the Horizon Value for all free cash flows beyond Year 4 discounted back to Year 4.

f. What is the current value of firm for Johnson Corporation?

Levered Beta and CAPM –

Zeta Corporation is in the process of determining their optimal capital structure. After detailed analysis, they have determined that a 35% debt, 65% equity is the optimal structure.

The following information is provided:

T-bills are yielding 1%

Zeta’s tax rate is 35%

Zeta’s unlevered beta is 1.25

Return on the Market is 8%

Zeta’s yield on debt is 5.6%.

a. Calculate the levered beta for Zeta Corporation, given the optimal capital structure.

b.   What is the required return on equity (CAPM) for the optimal capital structure?