Sensitivity Analysis

(b) (5 points) Mr. Henry would like to know how the levered value of Atom (baseline estimate of $252.81 million) will vary by changing the following assumption: 1. The interim period cost of debt (baseline rD assumed to be 10.5% from years 1-5) 2. The terminal cost of debt (baseline rD assumed to be 9% from year 6 onward) 3. The effective tax rate (baseline Tc assumed to be 34%). Produce a spider chart in which the assumptions for the interim period cost of debt, terminal cost of debt, and effective tax rates are allowed to change. For each variable, let their values vary in % difference from their baseline assumptions, where the % difference ranges from -20% to +20% in 4% increments (i.e. -20%, -16%, - 12%, ..., 20%). Make sure to label your axes. Which of the three variables is the levered value most sensitive to, according to the spider chart?

Equity-Debt Mix
Debt cost of capital (years 1 - 5):	10.50%
Debt cost of capital (years 6+):	9.00%
Tax rate:	34%
Year:	0	1	2	3	4	5
Interest		21.6	19.1	17.8	16.7	15.8
Interest tax shield		7.3	6.5	6.1	5.7	5.4
PV of interest tax shield @ 10.50%		6.6	5.3	4.5	3.8	3.3
Terminal value of tax shields (after year 5)						37.25
PV of terminal value of tax shields (after year 5)	24.21	<- discount @ 9% since $140m is predetermined
PV of interest tax shields (years 1 - 5)	23.52
PV of ITS (total)	47.73
Levered Value	252.81