Purchase Solution

Schwarzentraub Industries' Case Study: MM Extension

Not what you're looking for?

Ask Custom Question

Schwarzentraub Industries' expected free cash flow for the year is $500,000 in the future free cash flow is expected to grow at a rate of 9%. The company currently has no debt, and its cost of equity is 13%. Its tax rate is 40%.
a. Find Vu
b. Find VL and rsL is Schwarzentraub uses $5 million in debt with a cost of 7%. Use the extension of the MM model that allows for growth.
c. Based on Vu from part a, find VL and rsL,using the MM model (with taxes) if Schwarzentraub uses $5 million in 7% debt.
d. Explain the difference between your answers to parts b and c.

Purchase this Solution

Solution Summary

Schwarzentraub Industries' Case Study is examined. The cost of equity and cost of debt is determined. The MM model is examined for growth extensions.

Solution Preview

a. Vu = FCF1/(Cost of equity - growth rate)
FCF1 = 500,000, cost of equity = 13% and growth rate = 9%
Vu = 500,000/(13%-9%) = $12,500,000

b. Under the MM extension model
VL = Vu + (Debt tax shield/(cost of equity - growth rate))
Debt tax shield = Debt amount X interest rate X tax rate = 5,000,000 X 7% X 0.4 = ...

Purchase this Solution

Free BrainMass Quizzes
Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.


This tests some key elements of major motivation theories.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

Accounting: Statement of Cash flows

This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.

Introduction to Finance

This quiz test introductory finance topics.