need help with step 1 & 2
The following are the instructions for Case 2: THE LEVERAGED BUYOUT OF CHEEK PRODUCTS, INC., you have to use the APV approach in determining the value of the stock. just a reminder, in calculating unlevered cashflow, you have to use the CFFA equation = OCF - NCS -CH. NWC, of course, you have to consider the asset sales as positive cashflow. You have to do the following four steps: Step 1: Calculating the present value of unlevered cash flows for the first five years, use year 2019 as your first year, and you have to use the discount rate of 15%. Step 2: Calculating the present value of the unlevered cash flows beyond the first five years, the growing perpetuity starts in year 6, so your Terminal value will be in year 5, and of course you have to bring this value back to time zero. Also, in this step, you have to use the 15 % discount rate. Step 3: Calculating the present value of interest tax shields for the first five years using the cost of debt of 12.5% as the appropriate discount rate for the interest tax shields. Step 4: Calculating the present value of interest tax shields beyond the first five years. Here, I'll make it very simple on you, simply calculate the interest tax shield in year 5 as 25% of your final answer in step 3. Once you get it, simply discount it back to time zero using again the cost of debt of 12.5% as the appropriate discount rate. The following are the instructions for Case 2: THE LEVERAGED BUYOUT OF CHEEK PRODUCTS, INC., you have to use the APV approach in determining the value of the stock. just a reminder, in calculating unlevered cashflow, you have to use the CFFA equation = OCF - NCS -CH. NWC, of course, you have to consider the asset sales as positive cashflow. You have to do the following four steps: Step 1: Calculating the present value of unlevered cash flows for the first five years, use year 2019 as your first year, and you have to use the discount rate of 15%. Step 2: Calculating the present value of the unlevered cash flows beyond the first five years, the growing perpetuity starts in year 6, so your Terminal value will be in year 5, and of course you have to bring this value back to time zero. Also, in this step, you have to use the 15 % discount rate. Step 3: Calculating the present value of interest tax shields for the first five years using the cost of debt of 12.5% as the appropriate discount rate for the interest tax shields. Step 4: Calculating the present value of interest tax shields beyond the first five years. Here, I'll make it very simple on you, simply calculate the interest tax shield in year 5 as 25% of your final answer in step 3. Once you get it, simply discount it back to time zero using again the cost of debt of 12.5% as the appropriate discount rate
