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Pinnacle Enterprises is expected to have next year’s free cash flow of $14 million. FCF is expected to grow at 5% per year into foreseeable future. Pinnacle’s cost of equity capital is 15%, cost of debt is 8%, and it is in the 40% corporate tax bracket. Pinnacle currently maintains a 0.4 debt to equity ratio. What would be the value of Pinnacle as an all equity firm would?

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Answer:

If Pinnacle was an all equity firm its WACC would be the same as the cost of equity capital which is 15%.Also if it was an all equity firm all the free cash flow would be available to the shareholders as there was no debt and no money needed to be given to the debtors

The formula to find the value of a firm using the FCF is

FCF*(1+G)/WACC-G

14*(1+0.5)/0.15-0.5

=14.7/0.10=147

The value of Pinnacle as an all equity firm would be $147 million

Explanation:

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