PART 4 ANSWERS:

EBIT = $106,000,000

INTEREST EXPENSE: 7,000,000

Part 2- Dynamic Capital Structure of Modigliani-Miller-Adjusted Present Value (APV) Sun expects its EBIT to increase by 5 percent for the next 3 years and after which at a constant rate of 3 percent in perpetuity. The expected interest expense is also expected to grow over next 3 years before the capital structure becomes constant. The cost of debt and the cost of capital are based on the calculation of part 4. Any investment in net working capital and capital expenditure is equal to its depreciation allowances. Using any information from part I to answer the following questions: a. What is the estimated terminal unlevered value of operations? b. What is the current unlevered value of operations? c. What is the terminal value of the tax shield at Year 3? d. What is the current value of the tax shield? e. What is the current total value? (Wd*After- tax cost of debt)+ (We*RsL) bu*(1 + (1- T)*Wd/We] Rf +(B*Rmp) Formula Rd*(1-1) Percent financed with debt (Wd) Percent financed with equity (We) Before- tax cost of debt (Rd) Bond rating After- tax cost of debt Unlevered cost of quity (RSU) Unlevered beta (bu) Levered beta (B) Levered cost of equity (RsL) WACC 0.1 0.9 AAA 7.00% 4.20% 12.00% 1.20 1.28 12.40% 11.58% 0.2 0.8 | 7.20% 4.32% 12.00% 1.20 1.38 12.90% 11.18% 0.3 A 8.00% 4.80% 12.00% 1.20 1.51 13.54% 10.92% 0.4 0.6 BBB 8.80% 5.28% 12.00% 1.20 1.68 14.40% 10.75% 0.5 BB 9.60% 5.76% 12.00% 1.20 1.92 15.60% 10.68% 0.4 B 11.00% 6.60% 12.00% 1.20 2.28 17.40% 10.92% Part 2- Dynamic Capital Structure of Modigliani-Miller-Adjusted Present Value (APV) Sun expects its EBIT to increase by 5 percent for the next 3 years and after which at a constant rate of 3 percent in perpetuity. The expected interest expense is also expected to grow over next 3 years before the capital structure becomes constant. The cost of debt and the cost of capital are based on the calculation of part 4. Any investment in net working capital and capital expenditure is equal to its depreciation allowances. Using any information from part I to answer the following questions: a. What is the estimated terminal unlevered value of operations? b. What is the current unlevered value of operations? c. What is the terminal value of the tax shield at Year 3? d. What is the current value of the tax shield? e. What is the current total value? (Wd*After- tax cost of debt)+ (We*RsL) bu*(1 + (1- T)*Wd/We] Rf +(B*Rmp) Formula Rd*(1-1) Percent financed with debt (Wd) Percent financed with equity (We) Before- tax cost of debt (Rd) Bond rating After- tax cost of debt Unlevered cost of quity (RSU) Unlevered beta (bu) Levered beta (B) Levered cost of equity (RsL) WACC 0.1 0.9 AAA 7.00% 4.20% 12.00% 1.20 1.28 12.40% 11.58% 0.2 0.8 | 7.20% 4.32% 12.00% 1.20 1.38 12.90% 11.18% 0.3 A 8.00% 4.80% 12.00% 1.20 1.51 13.54% 10.92% 0.4 0.6 BBB 8.80% 5.28% 12.00% 1.20 1.68 14.40% 10.75% 0.5 BB 9.60% 5.76% 12.00% 1.20 1.92 15.60% 10.68% 0.4 B 11.00% 6.60% 12.00% 1.20 2.28 17.40% 10.92%