The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach?
A. $1 billion
B. $2 billion
C. $3 billion
D. $4 billion
B. $2 billion
Total value = 300/.10 = $3 billion
Equity value = $3 billion - 1 billion = $2 billion
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