Fact Pattern EBITDA (pre tax cash flow from operations) $25,000,000 Depreciation and Amortization (non cash expenses) 2,500,000 Interest Expense 4,000,000 Income Taxes 40 Forecasted annual Capital Expenditures 3,000,000 Forecasted annual increases in Net Working Capital 1,800,000 Forecasted annual increases in long term debt 2,500,000 Risk free rate of return 6 00 Market risk premium (S P 500) 8 50 Interest Rate on Corporate long term debt 8 00 Systematic Risk coefficient (reflective of operating and financial risk) 1 00 Bidders expectations on target companys debt capital proportion 40 00 Bidders expectations on long term growth expectations 5 00 Required Establish the respective required returns for a Expected Asset Return b Expected Equity Return c Expected Return on all Invested Capital Establish the respective values for a All Invested Capital (using CCF and WACC and APV) b The Firms Equity Capital Please note that the results may not be precisely the same, but close enough to support your argument that all valuation models will lead to a reasonably identical value It may be assumed that if Debt is not intended to be a constant dollar amount, then it may be assumed that the cash flows derived from the interest tax shield are as risky as the overall firms cash flows

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Posted on Jul 01, 2024

Fact Pattern: EBITDA (pre-tax cash flow from operations) $25,000,000 Depreciation and Amortization (non-cash expenses) 2,500,000 Interest Expense 4,000,000 Income Taxes 40% Forecasted annual Capital Expenditures

Fact Pattern:

EBITDA (pre-tax cash flow from operations) $25,000,000

Depreciation and Amortization (non-cash expenses) 2,500,000

Interest Expense 4,000,000

Income Taxes 40%

Forecasted annual Capital Expenditures 3,000,000

Forecasted annual increases in Net Working Capital 1,800,000

Forecasted annual increases in long-term debt 2,500,000

Risk-free rate of return 6.00%

Market risk-premium (S&P 500) 8.50%

Interest Rate on Corporate long-term debt 8.00%

Systematic Risk coefficient (reflective of operating and financial risk) 1.00

Bidders expectations on target companys debt/capital proportion 40.00%

Bidders expectations on long-term growth expectations 5.00%

Required:

Establish the respective required returns for:

a: Expected Asset Return

b: Expected Equity Return

c: Expected Return on all Invested Capital

Establish the respective values for:

a: All Invested Capital (using CCF and WACC and APV)

b: The Firms Equity Capital

Please note that the results may not be precisely the same, but close enough to support your argument that all valuation models will lead to a reasonably identical value.

It may be assumed that if Debt is not intended to be a constant dollar amount, then it may be assumed that the cash flows derived from the interest tax shield are as risky as the overall firms cash flows.