Financial Management: Theory & Practice
16th Edition
ISBN: 9780357296776
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning US
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Chapter 21, Problem 10SP
a.
Summary Introduction
To calculate:
Horizon value at year 4
b.
Summary Introduction
To calculate:
Current unlevered value of operations
c.
Summary Introduction
To calculate:
Horizon value of tax shield at year 3
d.
Summary Introduction
To calculate:
Current value of tax shield
e.
Summary Introduction
To calculate:
Current total value
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A company forecasts free cash flow of $400 at Year 1 and $600at Year 2; after Year 2, the FCF grow at a constant rate of 5%.The company forecasts the tax savings from interest deductionsas $200 in Year 1, $100 in Year 2; after Year 2, the tax savingsgrow at a constant rate of 5%. The unlevered cost of equityis 9%. What is the horizon value of operations at Year 2?($15,750.0) What is the current unlevered value of operations?($14,128.4) What is the horizon value of the tax shield at Year 2?($2,625.0) What is the current value of the tax shield? ($2,477.1)What is the levered value of operations at Year 0? ($16,605.5)
Start with the partial model in the file Ch21 P08 Build a Model.xlsx on the textbook’s Web site. Kasperov Corporation has an unlevered cost of equity of 12% and is taxed at a 40% rate. The 4-year forecasts of free cash flow and interest expenses are shown in the following table; free cash flow and interest expenses are expected to grow at a 5% rate after Year 4. Using the compressed APV model, answer the following questions.
INPUTS (In Millions)
Projected
Year:
1
2
3
4
Free cash flow
$200
$280
$320
$340
Interest expense
$100
$120
$120
$140
Calculate the current value of unlevered operations.
Calculate the estimated horizon value of the tax shield at Year 4 (i.e., immediately after the Year-4 free cash flow).
Calculate the current value of the tax shield.
Calculate the current total value.
Start with the partial model in the file Ch07 P25 Build a Model.xlsx on the textbook’s Web site. Selected data for the Derby Corporation are shown here. Use the data to answer the following questions.a. Calculate the estimated horizon value (i.e., the value of operations at the end of the forecast period immediately after the Year-4 free cash flow). Assume growth becomes constant after Year 3.b. Calculate the present value of the horizon value, the present value of the free cash flows, and the estimated Year-0 value of operations. c. Calculate the estimated Year-0 price per share of common equity. INPUTS (In Millions) YearCurrent Projected0 1 2 3 4Free cash flow −$20.0 $20.0 $80.0 $84.0Marketable securities $40Notes payable $100Long-term bonds $300Preferred stock $50WACC 9.00%Number of shares of stock 40
Chapter 21 Solutions
Financial Management: Theory & Practice
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