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Problem:

Company E has a debt-equity ratio of 0.56. The required return on the company's levered equity is 12 percent, and the pre-tax cost of the firm's debt is 4 percent. Sales revenue is expected to remain at $22.2M in perpetuity. Variable costs amount to 60 percent of sales. The tax rate is 40 percent, and the company distributes all its earnings as dividends.

Requirement:

Question 1: Use the weighted average cost of capital method to calculate the value of the company.

Question 2: Use the flow to equity (FTE) method to calculate the value of the company's equity.

Quesiton 3: Briefly describe the difference, if any, in your valuations.

Note: Provide support for rationale.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91167169

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