Assignment:
Schwarzentraub Industries’ expected free cash flow for the year is $500,000; in the future free cash flow is expected to grow at a rate of 9 percent. The company currently has no debt, and its cost of equity is 13 percent. Its tax rate is 40 percent.
a. Find VU.
b. Find VL and rsL if Schwarzentraub uses $5 million in debt with a cost of 7 percent. Use the extension= to the MM model that allows for growth.
c. Based on VU from part a, find VL and rsL using the MM model (with taxes) if Schwarzentraub uses $5 million in 7 percent debt.
d. Explain the difference between the answers to parts b and c.
Provide complete and step by step solution for the question and show calculations and use formulas.