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Question
Sallie's SandwichesSallie's Sandwichesis financed using 20% debt at a cost of 8%. Sallie projects combined free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 value includes the combinedhorizon values of FCF and tax shields.) All cash flows are expected to grow at a 3% constant rate after Year 4. Sallie'sbeta is 2.0, and its tax rate is 34%. The risk-free rate is 8%, and the market risk premium is 4%.
Using the data for Sallie's Sandwiches andthe compressed adjusted present value model, what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?
a. 12.0%
b. 13.9%
c. 14.4%
d. 16.0%
e. 16.9%
Answer
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