Part 1. Kasperov Corporation has an unlevered cost of equity of 10% and is taxed at a 35% rate. The 4-year forecasts of free cash flow and interest expenses are shown in the following table; free cash flow and interest expenses are expected to grow at a 6% rate after Year 4. INPUTS (In millions) Year Projected 1 $200.0 $100.0 Free cash flow Interest expense 2. $280.0 $120.0 3 $320.0 $120.0 4 $340.0 $140.0 Long-term growth rate Tax rate Unlevered cost of equity (rosu) 4% 35% 10.00% a. Using the compressed APV model to calculate the current total value. Current 0 Projected 2 1 3 4 $200.0 $280.0 $320.0 Free cash flow Horizon unlevered value of operations $340.0 $3,535.96 Tax savings Horizon unlevered value of operations ($0.04) Total value b. Use the APV model to calculate the current total value. 1) Assumerts = 8% Discount rate for tax savings (rts) 8.00% b. Use the APV model to calculate the current total value. 1) Assumerts = 8% Discount rate for tax savings (rts) 8.00% Current 0 Projected 2 1 3 4 $200.0 $280.0 $320.0 $340.0 Free cash flow Horizon unlevered value of operations Tax savings Horizon unlevered value of operations Total value 2) NOW conduct a sensitivity analysis to determine the sensitivity of the total value to changes in the discount rate for tax savings (rs). Use the values in the table as your range above and below the base-case value. IRF -2% -1% Base Case +1% Discount rate for tax savings (TS) Base Total Value 8.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% rcsu 3) What is an interest tax shield and what is the value of the tax shield? Part 1. Kasperov Corporation has an unlevered cost of equity of 10% and is taxed at a 35% rate. The 4-year forecasts of free cash flow and interest expenses are shown in the following table; free cash flow and interest expenses are expected to grow at a 6% rate after Year 4. INPUTS (In millions) Year Projected 1 $200.0 $100.0 Free cash flow Interest expense 2. $280.0 $120.0 3 $320.0 $120.0 4 $340.0 $140.0 Long-term growth rate Tax rate Unlevered cost of equity (rosu) 4% 35% 10.00% a. Using the compressed APV model to calculate the current total value. Current 0 Projected 2 1 3 4 $200.0 $280.0 $320.0 Free cash flow Horizon unlevered value of operations $340.0 $3,535.96 Tax savings Horizon unlevered value of operations ($0.04) Total value b. Use the APV model to calculate the current total value. 1) Assumerts = 8% Discount rate for tax savings (rts) 8.00% b. Use the APV model to calculate the current total value. 1) Assumerts = 8% Discount rate for tax savings (rts) 8.00% Current 0 Projected 2 1 3 4 $200.0 $280.0 $320.0 $340.0 Free cash flow Horizon unlevered value of operations Tax savings Horizon unlevered value of operations Total value 2) NOW conduct a sensitivity analysis to determine the sensitivity of the total value to changes in the discount rate for tax savings (rs). Use the values in the table as your range above and below the base-case value. IRF -2% -1% Base Case +1% Discount rate for tax savings (TS) Base Total Value 8.00% 5.00% 6.00% 7.00% 8.00% 9.00% 10.00% rcsu 3) What is an interest tax shield and what is the value of the tax shield
