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In year 1 AMC will earn 2100 before interest and taxes The market expects these earnings to grow at a rate of 27 per year The firm will make no net investments ie capital expenditures will

In year 1, AMC will earn $2100 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax 
rate equals 42%. Right now, the firm has $5250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The 
asset beta for this industry is 1.27.
a. If AMC were an all-equity (unlevered) firm, what would its market value be?
b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC’s debt is expected to grow by 2.7% per year, at what rate are its interest payments expected to grow?
c. Even though AMC’s debt is riskless (the firm will not default), the future growth of AMC’s debt is uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as AMC’s assets, what is the present value of AMC’s interest tax shield?

Jun 09 2021 View more View Less

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