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?