**Question 4**

Your manager wants you to help him value the Firm K and its equity and debt. The risk-free rate is 2% while the expected market return is 5%.

Firm K’s beta is 1.5. Firm’s K debt to equity is 1:1. Firm’s K cost of debt is 2.5% while its corporate tax rate is 30%. Its free cashflow for equity is $1 million per year. Interest expense is $50,000 per year with no Net borrowing. Successive cash flows (equity and firm) grow at 1% annually.

**(a)** Using Capital Asset Pricing Model (CAPM), calculate the cost of equity for Firm K.

**(b)** Calculate the Weighted Average Cost of Capital (WACC).

**(c)** How does the corporate tax reduce the overall WACC?

**(d)** Using free cash flow valuation methods, compute value of equity, firm and debt.

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