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5 September, 10:59

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

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  1. 5 September, 12:33
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    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
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