V5 A7 Q16-Q20

Please show all workings and/or give explanations

You are an analyst at Goldman Sachs tasked with valuing a company, Incline, Inc., a private company. You estimate that the earnings of Incline (or EBIT) will be $100,000 next year (at t = 1) and then grow at 2% for the foreseeable future. Specifically, $100,000 at t = 1 and $102,000 at t = 2, etc. Your due diligence and analysis of comparable firms in the same industry have revealed that the beta

asset in the business of Incline, Inc. is 1.50. The risk free rate is 2.50% and the expected market risk premium (the premium that the market is expected to earn over the risk free rate) is 5.00%. The balance sheet of Incline shows that it has $250,000 of debt that it plans to maintain for the foreseeable future and the interest on the debt is 5%. The corporate tax rate is 35%, interest payments on debt are tax deductible and it is reasonable to assume that the riskiness of the

tax shield is the same as the debt. You estimate that the chances that Incline, Inc. will go bankrupt in the future are negligible.

Answers from previous questions
Unlevered Re	10%
Unlevered PV FCF	812,500
Interest expense	12,500
TS	4,375
PV TS discounted at Rd	87,500
APV firm value at t=0	900,000
FCFE yr 1	52,500
FCFE yr 2	53,800
FCFE yr 3	55,126
Equity value at t=0	650,000
Debt to equity ratio at t=0	38.46%
Debt to equity ratio at t=1	37.52%
Unlevered CF at t=1	828,750
Value of firm at t=1	916,250
Equity value at t=1	666,250

For all answers that follow Use the adjusted present value method (APV)

Q16. The Enterprise Valuation method cannot be applied to this situation unless:

a) The debt to equity ratio is fixed upfront and never changed.

b) The WACC is adjusted each year for the change in capital structure.

c) The return on asset is adjusted every year for the change in capital structure.

Q17	Using APV method	What will be the value of Incline, Inc. one year from now (at t = 1)??
Q18	Using APV method	What is the return on equity to shareholders of Incline, Inc. from t = 0 to t = 1???
Q19	Using APV method	What is the weighted average cost of capital (WACC) of Incline, Inc. from t = 0 to t = 1 ???
Q20	Using APV method	What will be the weighted average cost of capital (WACC) of Incline, Inc. one year from from t = 1 to t = 2? a) 8.90% b) 9.05% c) 9.00% d) 8.95%