Part 8 (ch15) Questions Numeric
Last updated: 27/05/2025
Type your answers with “.” instead of “,”! For numerical answers, use 2 decimal places. For instance, if your answer is 0.12345 or 12.345%, type, “12.34” in the box.
Q1
Q1: Aurora Technologies expects to generate free cash flow of $8.04 million over the next year. The company anticipates that its free cash flow will grow at a constant rate of 3% annually thereafter. Aurora’s cost of equity is 13.82%, and its cost of debt is 8.39%. The corporate tax rate is 35%.
Assuming that Aurora maintains a debt-to-equity ratio of 0.5, what is the company’s pre-tax weighted average cost of capital (WACC) (in %)?
Answer: 12.01%
Q2
Q: What would be the value of Aurora as an all-equity (unlevered) firm (in million dollars)?
Answer: 89 million dollars
Q3
Q: What is Aurora’s after-tax weighted average cost of capital (WACC) (in %)?
Answer: 11.03%
Q4
Q: Using the after-tax WACC you calculated, what is the value of Aurora Technologies as a levered firm (in million dollars)?
Answer: 100 million dollars
Q5
Q: Assume that A’s current pre-tax WACC is 14.1%, the corporate tax rate is 25%, and the pre-tax cost of debt is 6.8%. If the company were to issue sufficient debt to achieve a debt-to-value ratio of 0.55, what would be the after-tax WACC (in %) (ps. ignore personal taxes)?
Answer: \(After-tax WACC = \frac{E}{D+E} \times re + \frac{D}{D+E} \times rd - (\frac{D}{D+E} \times rd \times Tc )\) = 13.16%