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a. Suppose that Firms U and L are growing at a constant rate of 7% and that the investment in net operating assets required to support this

growth is $50000 (10% of EBIT). Use the compressed APV model to estimate the value of U and L estimate the levered cost of equity and find the WACC.

b. Now suppose the expected FCF for Y1 is $250000 but it is expected to grow unevenly over the next 3 years: FCF Y2 = $290000 and FCF Y3 =

$320000 after which it will grow at a constant rate of 7%. The expected interest expense at Y1 is $80000 but it is expected to grow over the next couple of

years before the capital structure becomes constant: Interest expense at Y2 will be $95000 at Y3 it will be $120000 and it will grow at 7% thereafter. What

is the estimated horizon unlevered value of operations (i.e. the value at Y3 immediately after the FCF at Y3)? What is the current unlevered value of

operations? What is the horizon value of the tax shield at Y3? What is the current value of the tax shield? What is the current total value? The tax rate and

unlevered cost of equity remain at 40% and 14% respectively.