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Netsoft is a company that manufactures networking software. In the current year 2021, the firm reported operating earnings before interest and taxes (EBIT) of $250 million. These earnings are expected to grow at a rate of 4% per year in perpetuity. The non-cash expenses in EBIT amount to $50 million, and are also expected to grow at a rate of 4% per year. Furthermore, Netsoft’s debt expressed in absolute dollar terms is expected to remain constant over time at $400 million. Take the following information as given:
Beta (unlevered assets) ßUA = 1.2,
Leverage ratio D/V = 15%,
Marginal tax rate TC = 40%,
Return on debt rD = 10%
risk-free rate rf = 6%
market risk premium (rM – rf) = 5.5%
Derive the enterprise value using the CCF method assuming a constant leverage ratio of 15% for the infinite future.
a. EV_CCF= 2438
b. EV_CCF= 2604
c. EV_CCF = 3485