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UVA-F-1611 Valuation with Taxes: Value of Claims It should be noted that the logic behind the WACC approach is that the operating decisions of the

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UVA-F-1611 Valuation with Taxes: Value of Claims It should be noted that the logic behind the WACC approach is that the operating decisions of the firm are reflected in the cash flows, while all the financing decisions are reflected in the discount rate. But the central logic of valuation-discount cash flows at an appropriate rate can be applied to more than just this one case. In fact, we can view the firm in a number of different ways and value the firm accordingly. In this section, rather than valuing the whole firm using the WACC approach, we will value cach of the claims (debt and equity) on the firm separately. The sum of these claims will be equal to the enterprise value. In Table 4, you will use the cost of equity from the prior calculations. Table 4. The sum of the claims will be equal to the enterprise value. No Debt 104,000 EBIT Interest payments Income before taxes Tax Net income (cash to equity) Debt = $380,000 104,000 22 600 81,200 24 360 56,840 104,000 31200 72,800 10.40%. 13.09 Cost of equity Value of equity Cash to debt (interest) Cost of debt Value of debt Enterprise value Interest : 6%. - Debat = 380,000 -tox = 30% - Cost of delat = 6% - Cost of equiry: 10.404. UVA-F-1611 Valuation with Taxes: Value of Claims It should be noted that the logic behind the WACC approach is that the operating decisions of the firm are reflected in the cash flows, while all the financing decisions are reflected in the discount rate. But the central logic of valuation-discount cash flows at an appropriate rate can be applied to more than just this one case. In fact, we can view the firm in a number of different ways and value the firm accordingly. In this section, rather than valuing the whole firm using the WACC approach, we will value cach of the claims (debt and equity) on the firm separately. The sum of these claims will be equal to the enterprise value. In Table 4, you will use the cost of equity from the prior calculations. Table 4. The sum of the claims will be equal to the enterprise value. No Debt 104,000 EBIT Interest payments Income before taxes Tax Net income (cash to equity) Debt = $380,000 104,000 22 600 81,200 24 360 56,840 104,000 31200 72,800 10.40%. 13.09 Cost of equity Value of equity Cash to debt (interest) Cost of debt Value of debt Enterprise value Interest : 6%. - Debat = 380,000 -tox = 30% - Cost of delat = 6% - Cost of equiry: 10.404

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