Assume that we are now at the beginning of the year 2020 and are trying to evaluate Company A using discounted cash flow valuation model. Please answer the following questions:

(a) The current leveraged beta of Company A is estimated to be 2.0 and the marginal tax rate is 40%. The risk-free rate for all the maturity is 3% and the market risk premium is 6.62%. According to Company A’s balance sheet, its debt-to-equity ratio is 1.00 currently. Next year, Company A expects to increase its debt-to-equity ratio to 1.50. Please calculate Company A’s current cost of equity and estimate its cost of equity after it increases its debt-equity ratio.

(b) Company A is facing a very competitive market condition and the projected free cash flow to the firm for the next five years are 500 million, 550 million, 600 million, 620 million, 650 million, respectively. Assume the cash flows appear at the end of each year. Then it is expected to grow at a 3% beyond the fifth year. The WACC of the firm is estimated to be 10% and will not change in the future. Please use the “Perpetuity Growth Method” and estimate the firm’s enterprise value at the beginning of the year 2020 (now).