Problem:
Company E has a debt-equity ratio of 0.56. The required return on the company's levered equity is 12 percent, and the pre-tax cost of the firm's debt is 4 percent. Sales revenue is expected to remain at $22.2M in perpetuity. Variable costs amount to 60 percent of sales. The tax rate is 40 percent, and the company distributes all its earnings as dividends.
Requirement:
Question 1: Use the weighted average cost of capital method to calculate the value of the company.
Question 2: Use the flow to equity (FTE) method to calculate the value of the company's equity.
Quesiton 3: Briefly describe the difference, if any, in your valuations.
Note: Provide support for rationale.