TONE 2 3 4 Both Scenarios Assume: 5 5-year EBIT Average Tax Rate from Year +1 to Year +5 Cost of Debt Question: Use the DCF to show how an increase in long term debt of 20% would affect interest payments, taxes paid, and cash flow to shareholders over the next 5 years. Assume tax rate does not change. 6 7 8 9 10 11 Current Scenario: 12 LT Debt 13 5-year Interest Expense 14 Taxable Profits 15 Income Taxes Paid 16 5-year Cash to Shareholders 17 5-year Cash to Financiers 18 Cost of Equity Debt Increase 19 Increased Leverage Scenario: 20 20% Increase LT Debt 21 New 5-year Interest Expense 22 New Taxable Profits 23 New Income Taxes Paid 24 5-year New Cash to Shareholders 25 5-year New Cash to Financiers 26 27 Question: Calculate the total NPV of this tax shield. 28 NPV of the Tax Shield from Leverage Adjustment 29 FCF Chg. FCF from Leverage Adj. New FCF 30 31 32 33 34 New Total Debt 35 Total Equity 36 New WACC 42 Shares Outstanding 43 Dividend Per Share 44 45 Question: Can 3M null off o Instructions: 40,879 Use=su