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The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach?

Respuesta :

Answer:

$2 billion

Explanation:

For computing the value of equity, first we have to determine the total equity firm which is shown below:

Total equity value = Free cash flow to the firm ÷ WACC

                             = $300 million ÷ 10%

                             = $3 billion or 3,000 million

Now the value of the equity would be

= $3 billion - $1 billion

= $2 billion

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