P$11\mathrm{.}8$ Valuing a Company with Interest and Net Operating Loss Carryforwards: Use the information in the following schedule, which contains two years of historical performance and five years of forecasts, to value the firm as of the end of Year $0$ using the following assumptions. Assume the company's income tax rate on all income is $30\%,$ the tax deduction for interest in any year is limited to $33\mathrm{.}333\%$ of EBIT in that year, any interest payment above the interest deduction cap in a year can be carried forward indefinitely, the company can only use its NOL carryforwards to offset a maximum of $75\%$ of its taxable income before NOL offsets, and the company's EBIT based on its financial statements is equal to its EBIT for income taxes. Also assume the company's unlevered cost of capital is $11\%,$ its interest rate $($and debt cost of capital$)$ is $9\%,$ its discount rate for its interest tax shields is equal to its unlevered cost of capital, and its long$-$term growth rate $($Year $6$ onward$)$ is $2\%.$ Also assume that the company makes no investments in working capital and that CAPEX is equal to depreciation.

a$.$ Calculate the company's income taxes and interest and NOL carryforwards for the levered company $($including interest in the forecasts$).($Similar to Exhibit $11\mathrm{.}9.)$

b$.$ Calculate the company's income taxes and interest and NOL carryforwards for the unlevered company $($excluding interest in the forecasts but including interest in Years $1$ and $0).($Similar to Exhibit $11\mathrm{.}10.)$

c$.$ Calculate the company's income taxes and interest tax shields assuming the company can deduct all of its interest for income taxes and the company receives a tax refund if its EBIT is negative. $($Similar to Exhibit $11\mathrm{.}11.)$

d$.$ Calculate the effect of the company's interest and NOL carryforwards on the company's cash flows $($unlevered free cash flows and interest tax shields$)$ by subtracting the unlevered free cash flows and interest tax shields including the effects of interest and NOL carryforwards from the unlevered free cash flows and

interest tax shields excluding the effects of interest and NOL carryforwards. Compare these differences to the sum of the interest and NOL carryforwards. $($Similar to Exhibit $11\mathrm{.}12.)$

e$.$ Measure the value of the firm by separately valuing the firm without interest and NOL carryforwards and then adding the value of the pre$-$valuation and post$-$valuation interest carryforwards and NOL carryforwards and assuming the company's capital structure strategy is based on the forecasts and the long$-$term growth rate. $($Use the APV valuation method, see Exhibit $11\mathrm{.}14.)$

f$.$ Measure the value of the firm including and excluding interest and NOL carryforwards and assuming the company's capital structure strategy is to finance $25\%$ of the firm with debt and $75\%$ with common equity excluding interest and NOL carryforwards. $($Similar to Exhibits $11\mathrm{.}15$ through $11\mathrm{.}18.)$

$g.$ Use the "short$-$cut" method to measure the value of the firm by separately valuing the firm without interest and NOL carryforwards and then adding the value of the pre$-$valuation and post$-$valuation interest carryforwards and NOL carryforwards using the weighted average cost of capital as the discount rate. Assume the company's capital structure strategy is to finance $25\%$ of the firm with debt and $75\%$ with common equity excluding interest and NOL carryforwards. $($Similar to Exhibit $11\mathrm{.}19.)$

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