Use the below information to value a mature levered company with growing annual perpetual cash flows and a constant debt-to-assets ratio. The next cash flow will be generated in one year from now, so a perpetuity can be used to value this firm. The firm's debt funding comprises annual fixed coupon bonds that all have the same seniority and coupon rate. When these bonds mature, new bonds will be re-issued, and so on in perpetuity. The yield curve is flat.
| Data on a Levered Firm with Perpetual Cash Flows | ||
| Item abbreviation | Value | Item full name |
| OFCF1 | $12.5m | Operating free cash flow at time 1 |
| FFCF1 or CFFA1 | $14m | Firm free cash flow or cash flow from assets at time 1 |
| EFCF1 | $11m | Equity free cash flow at time 1 |
| BondCoupons1 | $1.2m | Bond coupons paid to debt holders at time 1 |
| g | 2% pa | Growth rate of OFCF, FFCF, EFCF and Debt cash flow |
| WACCBeforeTax | 9% pa | Weighted average cost of capital before tax |
| WACCAfterTax | 8.25% pa | Weighted average cost of capital after tax |
| rD | 5% pa | Bond yield |
| rEL | 13% pa | Cost or required return of levered equity |
| D/VL | 50% pa | Debt to assets ratio, where the asset value includes tax shields |
| nshares | 1m | Number of shares |
| tc | 30% | Corporate tax rate |
Which of the following statements is NOT correct?