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Chapter:	21
Problem:	14
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 below. Free cash flow and interest expenses are expected to grow at a 5% rate starting after Year 4. Answer the following questions.
INPUTS (In millions)		Projected
Year		1	2	3	4
Free cash flow		$200.0	$280.0	$320.0	$340.0
Interest expense		$100.0	$120.0	$120.0	$140.0
Long-term growth rate		5%
Tax rate		40%
Unlevered cost of equity		12.00%
a. Calculate the estimated horizon value of unlevered operations at Year 4 (i.e., immediately after the Year-4 free cash flow).
		Current	Projected
			1	2	3	4
Free cash flow			$200.0	$280.0	$320.0	$340.0
Horizon unlevered value of operations
b. Calculate the current value of unlevered operations.
Current value of unlevered operations
a. Calculate the estimated horizon value of the tax shield at Year 4 (i.e., immediately after the Year-4 free cash flow).
		Current	Projected
			1	2	3	4
Interest expense			$100.0	$120.0	$120.0	$140.0
Tax savings			$40.0	$48.0	$48.0	$56.0
Horizon unlevered value of operations
d. Calculate the current value of the tax shield.
Current value of unlevered operations
d. Calculate the current total value.
Unlevered value of operations
Value of tax shield
Total value