Qc: Business Flows and Financing Effects 0% Debt/ 100% Equity 25% Debt 50% Debt/ 75% Equity 50% Equity Pure Business Cash Flows: EBIT $1,485 $1,485 $1,485 Taxes (@34%) $505 $505 $505 EBIAT $980 $980 $980 +Depreciation $500 $500 $500 -Capital exp. ($500) ($500) ($500) +Change in net working capital Free Cash Flow $980 $980 $980 Unlevered Beta 0.8 0.8 0.8 Risk-Free Rate Market Premium Unlevered WACC Value of Pure Business Flows: (FCF/Unlevered WACC) Financing Cash Flows Interest Tax Reduction $10,001.02 $10,001.02 $10,001.02 5.0% 5.0% 5.0% 6.0% 6.0% 6.0% 9.80% 9.80% 9.80% $0 $125 $250 $0.00 $42.50 $85.00 Pretax Cost of Debt 5.0% 5.0% 5.0% Value of Financing Effect: (Tax Reduction/Pretax Cost of Debt) $0 $850 $1,700 Total Value (Sum of Values of Pure Business Flows and Financing Effect $10,001 $10,851 $11,701