In year​ 1, AMC will earn ​$ before interest and taxes. The market expects these earnings to grow at a rate of per year. The firm will make no net investments​ (i. e., capital expenditures will equal​ depreciation) or changes to net working capital. Assume that the corporate tax rate equals ​%. Right​ now, the firm has ​$ in​risk-free debt. It plans to keep a constant ratio of debt to equity every​ year, so that on average the debt will also grow by ​% per year. Suppose the​ risk-free rate equals ​%, and the expected return on the market equals ​%. The asset beta for this industry is . a. If AMC were an​ all-equity (unlevered)​ firm, what would its market value​ be?
b. Assuming the debt is fairly​ priced, what is the amount of interest AMC will pay next​ year? If​ AMC's debt is expected to grow by ​% per​ year, at what rate are its interest payments expected to​ grow?
c. Even though​ AMC's debt is riskless​ (the firm will not​default), the future growth of​ AMC's debt is​ uncertain, so the exact amount of the future interest payments is risky. Assuming the future interest payments have the same beta as​ AMC's assets, what is the present value of​ AMC's interest tax​ shield?
d. Using the APV​ method, what is​ AMC's total market​ value, VL​? What is the market value of​ AMC's equity?
e. What is​ AMC's WACC? ​(Hint​: Work backward from the FCF and VL​.)
f. Using the​ WACC, what is the expected return for AMC​equity?
g. Show that the following holds for​ AMC: .
h. Assuming that the proceeds from any increases in debt are paid out to equity​ holders, what cash flows do the equity holders expect to receive in one​ year? At what rate are those cash flows expected to​ grow? Use that information plus your answer to part ​(f​) to derive the market value of equity using the FTE method.