Year 1 2 3 Net Income 1,500,000 1,750,000 3,800,000 Depreciation 2,000,000 2,000,000 0 Debt (beginning of the year) 10,000,000 12,000,000 15,000,000 From year 3 on the unlevered cash flow is expected to perpetually grow at 3.00% (that is, the unlevered cash flow of year 4 will be 5% higher than in year 3 and so on). The depreciation will stay equal to 0 from year 3 on, and also debt will stay perpetually at 15,000,000 starting at the beginning of year 3. The debt variations are all scheduled beforehand, hence there is no uncertainty about them. The interest rate is 2.55%, the unlevered return on equity is 7.50% and the depreciation tax shield is as risky as the company’s debt. The tax rate is 40%. a) What is the levered cash flow to equity holders in each one of the first three years? b) What is the levered value of the company’s assets?

Year 1 2 3 Net Income 1,500,000 1,750,000 3,800,000 Depreciation 2,000,000 2,000,000 0 Debt (beginning of the year) 10,000,000 12,000,000 15,000,000 From year 3 on the unlevered cash flow is expected to perpetually grow at 3.00% (that is, the unlevered cash flow of year 4 will be 5% higher than in year 3 and so on). The depreciation will stay equal to 0 from year 3 on, and also debt will stay perpetually at 15,000,000 starting at the beginning of year 3. The debt variations are all scheduled beforehand, hence there is no uncertainty about them. The interest rate is 2.55%, the unlevered return on equity is 7.50% and the depreciation tax shield is as risky as the company’s debt. The tax rate is 40%. a) What is the levered cash flow to equity holders in each one of the first three years? b) What is the levered value of the company’s assets?

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter14: Security Structures And Determining Enterprise Values

Section: Chapter Questions

Problem 8EP

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