Synergy Bhds operating income, depreciation, working capital, and capital spending are expected to grow 10 annually during the next 5 years and 5 after that The book value of the firms debt is RM200 million, with an annual interest expense of RM17 5 million and a term to maturity of 4 years The debt is a conventional interest only note, with a repayment of principal at maturity The firms annual preferred dividend expense is RM12 million The prevailing market yield on preferred stock issued by similar firms is 11 The firm does not have any operating leases, and pension and healthcare obligations are fully funded The firms current cost of debt is 10 The firms weighted average cost of capital is 12 Because it is already approximating the industry average, it is expected to remain at that level beyond the fifth year The firms current effective tax rate is at 25 The financial projection for the next 5 years is shown in Table 1 below Table 1 The financial projection for Synergy Bhd Financial data (in RM million) Current year Year 1 Year 2 Year 3 Year 4 Year 5 EBIT 100 110 121 133 1 146 4 161 EBIT (1 t) 75 82 5 90 8 99 8 109 8 120 8 Depreciation (straight line) 4 4 4 4 8 5 5 5 9 6 4 Net working capital 15 16 5 18 2 40 22 24 2 Gross capital spending 20 22 24 2 26 6 29 3 32 2 Free cash flow to the firm 44 48 4 53 2 58 6 64 4 70 9 Required Based on the information provided in Table 1, calculate the following Present value of free cash flow until year 5, Present value of terminal free cash flow, Present value of debt, Present value of the preferred share, and Value of the firm to ordinary equity investors Explain why the variable growth model is preferable in valuing Synergy rather than zero growth or constant growth DCF models Under which conditions it makes the most sense to use the zero growth and constant growth DCF models Be specific The small changes in the assumptions about the estimation of the terminal value will significantly impact the calculation of the total value of the target firm Explain why Calculate Synergys current cost of equity Estimate Synergys cost of equity after the firm increases its leverage to 75 of equity Assume that Synergy does not currently have any debt Its unlevered beta is estimated by examining comparable companies to be 1 2 The 10 year Treasury bond rate is 6 5 , and the historical risk premium over the risk free rate is 5 5 Next year, Synergy plans to borrow up to 75 of its equity value to fund future growth (e) Explain what does a firms measures What is the difference between an unlevered and levered Why is this distinction significant in considering an acquisition

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Synergy Bhds operating income, depreciation, working capital, and capital spending are expected to grow 10% annually during the next 5 years and 5% after that.

Synergy Bhds operating income, depreciation, working capital, and capital spending are expected to grow 10% annually during the next 5 years and 5% after that. The book value of the firms debt is RM200 million, with an annual interest expense of RM17.5 million and a term to maturity of 4 years. The debt is a conventional interest-only note, with a repayment of principal at maturity. The firms annual preferred dividend expense is RM12 million. The prevailing market yield on preferred stock issued by similar firms is 11%.

The firm does not have any operating leases, and pension and healthcare obligations are fully funded. The firms current cost of debt is 10%. The firms weighted average cost of capital is 12%. Because it is already approximating the industry average, it is expected to remain at that level beyond the fifth year. The firms current effective tax rate is at 25%. The financial projection for the next 5 years is shown in Table 1 below.

Table 1: The financial projection for Synergy Bhd. Financial data (in RM million)
Current year		Year 1		Year 2		Year 3		Year 4		Year 5
EBIT	100		110		121		133.1		146.4		161
EBIT (1 t)	75		82.5		90.8		99.8		109.8		120.8
Depreciation (straight line)	4		4.4		4.8		5.5		5.9		6.4
Net working capital	15		16.5		18.2		40		22		24.2
Gross capital spending	20		22		24.2		26.6		29.3		32.2
Free cash flow to the firm	44		48.4		53.2		58.6		64.4		70.9

Required:

Based on the information provided in Table 1, calculate the following:
1. Present value of free cash flow until year 5,

Present value of terminal free cash flow,
Present value of debt,
Present value of the preferred share, and
Value of the firm to ordinary equity investors.

Explain why the variable growth model is preferable in valuing Synergy rather than zero growth or constant growth DCF models. Under which conditions it makes the most sense to use the zero growth and constant growth DCF models? Be specific.

The small changes in the assumptions about the estimation of the terminal value will significantly impact the calculation of the total value of the target firm. Explain why.
1. Calculate Synergys current cost of equity.
2. Estimate Synergys cost of equity after the firm increases its leverage to 75% of equity.

1. Assume that Synergy does not currently have any debt. Its unlevered beta is estimated by examining comparable companies to be 1.2. The 10-year Treasury bond rate is 6.5%, and the historical risk premium over the risk-free rate is 5.5%. Next year, Synergy plans to borrow up to 75% of its equity value to fund future growth.

(e) Explain what does a firms measures. What is the difference between an unlevered and levered ? Why is this distinction significant in considering an acquisition?