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Question
Glassmaker Corporation DataGlassmaker Corporation has a currentcapital structure consisting of $5 million (market value) of 11% bonds and $10 million (market value) of common stock. Glassmaker's beta is 1.36. Glassmaker faces a 40% tax rate.Glassmaker plans on making big changes in operation and capital structure during the next several years. (Its tax rate will remain unchanged.) Under these plans, the free cash flows for Glassmaker are estimated to be $3.0 million for each of the next 4 years; the horizon value of the free cash flows (discounted at the rate assumed by the compressed adjusted present value (CAPV) approach) is $10.0 million at Year 4. The estimatedtax savings due to interest expenses areestimatedto be$1 million for each of the next 4 years; the horizon value of the tax shields (discounted at the rate assumed by the CAPV approach) is estimated to be $5 million at Year 4. Glassmaker has no nonoperating assets. Currently, the risk-free rate is 6.0% and the market risk premium is 4.0%.
Refer to data for Glassmaker Corporation.Using the compressed adjusted present value model, whatwill Glassmaker's value of equity be if it successfully implements its planned changes in operations and capital structure? (Round your answer to the closest thousand dollars.)
a. $16,019,000
b. $17,111,000
c. $18,916,000
d. $22,111,000
e. $22,916,000
Answer
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