Description

You have the following information about the Kellogg Furniture Company (KFC). 

• Annual sales in 2020 are $100,000. Sales are expected to grow at 3% a year. 

• The cash flows in 2020 have been distributed. The firm’s enterprise value is evaluated as a claim to its cash flows starting from 2021. 

• KFC’s profit margin is expected to be 26%. 

• Tax rate is 0%. 

• KFC is expected to reinvest 33% of its NOPAT in fixed assets and net working capital. 

• KFC has an equity beta of 1.3. 

• KFC is financed with 30% debt and 70% equity. 

• KFC’s debt is risk free, with a beta of 0. 

• The risk free rate of return is 2.5%, and the expected market risk premium is �(�� − ��) = 5%. 

• Hint: Use asset beta if you are analyzing the cost of capital for the firm