WACC and Modigliani & Miller Extension Models With Growth Assumptions
In mid-2012 , AOL Inc . had $ 100 million in debt , total equity capitalization of $ 3.1 billion , and an equity beta of 0.90 ( as reported on Yahoo ! Finance ). Included in AOL ’ s assets was $ 1.5 billion in cash and risk-free securities . Assume that the risk-free rate of interest is 3 % and the market risk premium is 4 %.
a . What is AOL ’ s enterprise value ? b . What is the beta of AOL ’ s business assets ? c . What is AOL ’ s WACC ?
Problem 15-15 Based on Chapter 15 : Debt and Taxes
Acme Storage has a market capitalization of $ 100 million and debt outstanding of $ 40 million . Acme plans to maintain this same debt-equity ratio in the future . The firm pays an interest rate of 7.5 % on its debt and has a corporate tax rate of 35 %.
a . If Acme ’ s free cash flow is expected to be $ 7 million next year and is expected to grow at a rate of 3 % per year , what is Acme ’ s WACC ?
b . What is the value of Acme ’ s interest tax shield ?