Question

Galt Industries has no debt, total equity capitalization of $600 million, and an equity beta of 1.2. Included in Galt's assets is $90 million in cash and risk-free securities. Assume the risk-free rate is 4% and the market risk premium is 6%.Galt's enterprise value is closest to:A) $90 millionB) $510 millionC) $600 millionD) $690 million

Answer 1

Answer: A

Explanation: using capital asset pricing model.

Ke=Risk free rate + Beta (risk premium)

Ke = 0.04 + 1.2(0.06)

Ke = 0.112.

value of equity = $600m × 0.112 = $67,200,000

value of cash= $90m × 0.112 = $10,080,000

Total value of firm = value of equity + value of cash

= $67,200,000+$10,080,000

= $77,280,000