In summer 2019, Forge Industries was evaluating a proposed purchase of one of its suppliers. The supplier, MetalTech, provides Forge with the raw steel Forge uses to fabricate hand tools and hardware. One of the first things that Forges managers did was to forecast the cash flows of MetalTech for the next five years:

Year Cash Flows

1 $1,100,000

2 $1,149,500

3 $1,201,228

4 $1,255,283

5 $1,311,770

Next, Forges management team looked up a group of similar firms and estimated MetalTechs cost of capital to be 14%. Finally, the team estimated that MetalTech would be worth approximately 5 times cash flow in five years.

1. What is your estimate of the enterprise value of MetalTech?
2. What is the value of the equity in MetalTech if the acquisition goes through, and Forge borrows $2.1 million and finances the remainder using equity?

Problem B

The following information provides the basis for performing a straightforward application of the adjusted present value (APV) model ($000,000s):

Assumptions

Unlevered cost of equity 13%

Borrowing rate 8%

Tax rate 25%

Current debt outstanding $200.00

Years

1 2 3 4 and Beyond

Firm FCFs $100.00 $120.00 $180.00 $200.00

Interest-bearing debt 200.00 150.00 100.00 50.00

Interest expense 16.00 12.00 8.00 4.00

Interest tax savings 4.15 2.88 1.78 1.12

1. What is the value of the unlevered firm, assuming that its free cash flows do not grow beyond year 4?
2. What is the value of the firms interest tax savings, assuming that they remain constant for year 4 and beyond?
3. What is the value of the levered firm?
4. What is the value of the levered firms equity, assuming that the firms debt is equal to its book value?