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28 Sep 2019
Based on the attached spreadsheet (loosely based on the APV example in class), compute the following with a 34% tax rate:
(a) Firm value according to APV where the present value of the interest tax shield is computed using Pre-tax WACC, not the cost of debt. (10 points)
(b) Firm value according to CCF. (10 points)
The APV and CCF valuations will be identical. Note that depreciation, CAPEX, and change in NWC are all zero.
Interest Paid $21.60 $19.10 $17.80 $16.70 $15.80 Free Cash Flows EBIT $22.70 $29.80 $37.10 $40.10 $42.10 -Taxes $7.72 $10.13 $12.61 $13.63 $14.31 34% tax r = Unlevered Free Cash Flow $14.98 $19.67 $24.49 $26.47 $27.79 Unlevered Cost of Equity 13.50% Pre-tax WACC or Return on Assets Cost of Equity 24.00% Cost of Debt 9.50% Terminal Growth Rate 0.00%
Based on the attached spreadsheet (loosely based on the APV example in class), compute the following with a 34% tax rate:
(a) Firm value according to APV where the present value of the interest tax shield is computed using Pre-tax WACC, not the cost of debt. (10 points)
(b) Firm value according to CCF. (10 points)
The APV and CCF valuations will be identical. Note that depreciation, CAPEX, and change in NWC are all zero.
| Interest Paid | $21.60 | $19.10 | $17.80 | $16.70 | $15.80 | ||
| Free Cash Flows | |||||||
| EBIT | $22.70 | $29.80 | $37.10 | $40.10 | $42.10 | ||
| -Taxes | $7.72 | $10.13 | $12.61 | $13.63 | $14.31 | 34% tax r | |
| = Unlevered Free Cash Flow | $14.98 | $19.67 | $24.49 | $26.47 | $27.79 | ||
| Unlevered Cost of Equity | 13.50% | Pre-tax WACC or Return on Assets | |||||
| Cost of Equity | 24.00% | ||||||
| Cost of Debt | 9.50% | ||||||
| Terminal Growth Rate | 0.00% | ||||||
Keith LeannonLv2
28 Sep 2019