a.

Weight of debt = Debt ratio = 23% = 0.23

Weight of equity = 1 Debt ratio = 1- 0.23 = 0.77

Required return of debt = 5%

Tax rate = 40%

Cost of debt = After tax return of debt = 5%*(1-0.40) = 3%

Cost of equity = Required return of equity = 12%

Weighted average cost of capital = Weight of debt*Cost of debt)+ (Weight of equity*Cost of equity)

Weighted average cost of capital (WACC) = (0.23*3%)+(0.77*12%) = 9.93%

Expected operating cash flows for next year = $61 million

Expected investment expenditures = $23 million

Expected free cash flows (FCF) for next year = $61 million - $23 million = $38 million

Perpetual Growth rate = 4%

Value of Icarus = Next year FCF/(WACC-Growth rate)

Value of Icarus = $38 million/(9.93%-4%) = $640.81 million = $641 million

b.

Value of companys equity = Value of Icarus*Weight of equity

Value of companys equity = $641 million * 0.77 = $493.6 million