Sallie's Sandwiches Sallie's Sandwiches Is Financed Using 20% Debt at a Cost

question 15

Multiple Choice

Sallie's Sandwiches
Sallie's Sandwiches is financed using 20% debt at a cost of 8%.Sallie projects combined free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4.(The Year 4 value includes the combined horizon values of FCF and tax shields.) All cash flows are expected to grow at a 3% constant rate after Year 4.Sallie's beta is 2.0, and its tax rate is 25%.The risk-free rate is 6%, and the market risk premium is 5%.
-Using the data for Sallie's Sandwiches and the compressed adjusted present value model, what is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

• A) 12.0%
• B) 13.9%
• C) 14.4%
• D) 16.0%
• E) 16.9%

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Definitions:

Vestibule

An anatomical term referring to a space or cavity at the entrance of a canal, such as the vestibule of the ear or the vestibule of the vagina.

Hymen

A thin membrane partially covering the introitus prior to first intercourse or other breakage.

Urethral Meatus

The external opening of the urethra, through which urine exits the body from the urinary bladder.

Luteinizing Hormone

A hormone produced by the anterior pituitary gland that plays a crucial role in regulating the reproductive system.