Question
Suppose the expected free cash flow for Year 1 is $250,000 but it is expected to grow unevenly over the next 3 years: FCF2 =
Suppose the expected free cash flow for Year 1 is $250,000 but it is expected to grow unevenly over the next 3 years: FCF2 = $290,000 and FCF3 = $320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is $80,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be $95,000, at Year 3 it will be $120,000 and it will grow at 7% thereafter.
Please use these numbers:
Tax Rate: Firm U = 40%, Firm L = 14%
Value of Firm: Firm U = 3,571,429, Firm L = 3,571,429
Value of Equity: Firm U = 3,571,429 , Firm L = 2,571,429
Levered Cost of Equity: = 16.33%
WACC = 14%
What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)?
What is the current unlevered value of operations?
What is the horizon value of the tax shield at Year 3?
What is the current value of the tax shield?
What is the current total value?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started