A Unlevered Cost of Equity Borrowing Rate Tax Rate Current debt outstanding Given 10.00% 6.00% 30.00% 180.00 $ 2022 $120 Year 2023 2024 $140 $180 FCFs 2025 & Beyond $220 Interest bearing debt $180 $150 $70 $50 Interest expense $11 $9 $4 $3 Interest tax savings $3.24 $2.70 $1.26 $0.90 Unlevered cost of equity-The rate of return required by stockholders in the company, where the firm has used only equity financing. Borrowing rateThe rate of interest the firm pays on its debt. We also assume that this rate is equal to the current cost of borrowing for the firm or current market rate of interest. Tax rate-The corporate tax rate on earnings. We assume that this tax rate is constant for all income levels. Current debt outstanding-Total interest-bearing debt, excluding payables and other forms of non-interest-bearing debt, at the time of the valuation Firm FCFS-Net operating earnings after tax (NOPAT), plus depreciation (and other noncash charges), less new investments in net working capital less capital expenditures (CAPEX) for the period. This is the free cash flow to the unlevered firm because no interest or principal is considered in its calcula Interest-bearing debt-Outstanding debt at the beginning of the period, which carries an explicit interest cost. Interest expense-nterest-bearing debt for the period times the contractual rate of interest that the firm must pay. Interest tax savings--Interest expense for the period times the corporate tax rate. 01.24 Interest tax savings $3.24 D2.70 Unlevered cost of equity-The rate of return required by stockholders in the company, where the firm has used only equity financing. Borrowing rate-The rate of interest the firm pays on its debt. We also assume that this rate is equal to the current cost of borrowing for the firr current market rate of interest. Tax rate-The corporate tax rate on earnings. We assume that this tax rate is constant for all income levels. Current debt outstanding-Total interest-bearing debt, excluding payables and other forms of non-interest-bearing debt, at the time of the valuation Firm FCFS-Net operating earnings after tax (NOPAT), plus depreciation (and other noncash charges), less new investments in net working capital capital expenditures (CAPEX) for the period. This is the free cash flow to the unlevered firm because no interest or principal is considered in its cal Interest-bearing debt-Outstanding debt at the beginning of the period, which carries an explicit interest cost. Interest expense-Interest-bearing debt for the period times the contractual rate of interest that the firm must pay. Interest tax savings-Interest expense for the period times the corporate tax rate. a. What is the value of the unlevered firm, assuming that its FCFs for year 5 and beyond are equal to the year 4 free cash flow? b. What is the value of the firm's interest tax savings, assuming that they remain constant for year 4 and beyond? c What is the value of the levered firm? d. What is the value of the levered firm's equity, assuming that the firm's debt is equal to its book value? Paragraph y R1 - - A Unlevered Cost of Equity Borrowing Rate Tax Rate Current debt outstanding Given 10.00% 6.00% 30.00% 180.00 $ 2022 $120 Year 2023 2024 $140 $180 FCFs 2025 & Beyond $220 Interest bearing debt $180 $150 $70 $50 Interest expense $11 $9 $4 $3 Interest tax savings $3.24 $2.70 $1.26 $0.90 Unlevered cost of equity-The rate of return required by stockholders in the company, where the firm has used only equity financing. Borrowing rateThe rate of interest the firm pays on its debt. We also assume that this rate is equal to the current cost of borrowing for the firm or current market rate of interest. Tax rate-The corporate tax rate on earnings. We assume that this tax rate is constant for all income levels. Current debt outstanding-Total interest-bearing debt, excluding payables and other forms of non-interest-bearing debt, at the time of the valuation Firm FCFS-Net operating earnings after tax (NOPAT), plus depreciation (and other noncash charges), less new investments in net working capital less capital expenditures (CAPEX) for the period. This is the free cash flow to the unlevered firm because no interest or principal is considered in its calcula Interest-bearing debt-Outstanding debt at the beginning of the period, which carries an explicit interest cost. Interest expense-nterest-bearing debt for the period times the contractual rate of interest that the firm must pay. Interest tax savings--Interest expense for the period times the corporate tax rate. 01.24 Interest tax savings $3.24 D2.70 Unlevered cost of equity-The rate of return required by stockholders in the company, where the firm has used only equity financing. Borrowing rate-The rate of interest the firm pays on its debt. We also assume that this rate is equal to the current cost of borrowing for the firr current market rate of interest. Tax rate-The corporate tax rate on earnings. We assume that this tax rate is constant for all income levels. Current debt outstanding-Total interest-bearing debt, excluding payables and other forms of non-interest-bearing debt, at the time of the valuation Firm FCFS-Net operating earnings after tax (NOPAT), plus depreciation (and other noncash charges), less new investments in net working capital capital expenditures (CAPEX) for the period. This is the free cash flow to the unlevered firm because no interest or principal is considered in its cal Interest-bearing debt-Outstanding debt at the beginning of the period, which carries an explicit interest cost. Interest expense-Interest-bearing debt for the period times the contractual rate of interest that the firm must pay. Interest tax savings-Interest expense for the period times the corporate tax rate. a. What is the value of the unlevered firm, assuming that its FCFs for year 5 and beyond are equal to the year 4 free cash flow? b. What is the value of the firm's interest tax savings, assuming that they remain constant for year 4 and beyond? c What is the value of the levered firm? d. What is the value of the levered firm's equity, assuming that the firm's debt is equal to its book value? Paragraph y R1
