Suppose KCS Corp. buys out Patagonia Trucking, a privately owned business, for $50 million. KCS has only $5 million cash in hand, so it arranges a $45 million bank loan. A normal debt-to-value ratio for a trucking company would be 50% at most, but the bank is satisfied with KCS€™s credit rating.
Suppose you were valuing Patagonia by APV in the same format as Table. How much debt would you include? Explainbriefly.

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TABLE Year 0 Forecast 3 2 5 7 Free cash flow 2.5 3.5 3.2 3.4 5.9 6.0 6.8 PV free cash flow, years 1-6 PV horizon value Base-case 19.7 64.6 84.3 Horizon value in year 6) 113.4 PV of company Debt 51.0 50.0 49.0 480 47.0 46.0 45.0 3.06 3.00 2.94 1.07 1.05 2.88 1.01 2.76 0.97 2.82 Interest tax shield 1.03 0.99 PV Interest tax shields 5.0 APV 89.3 Tax rate, % Opportunity cost of capital, % WACC, % (to discount horizon value to year 6) Long-term growth forecast, % Interest rate, % (years 1-6) 35.0 9.84 9.0 3.0 6.0 After-tax debt service 2.99 2.95 2.91 2.87 2.83 2.79