### Compressed APV with Nonconstant GrowthSheldon Corporation projects the following free cash flows (FCFs) and interest expenses for the next 3 years, after which FCF and interest expenses are expected to grow at a constant 5% rate. Sheldon's unlevered cost of equity is 15%; its tax rate is 25%.#### Financial Projections| Year | 1 | 2 | 3 ||------|------|------|------|| **Free Cash Flow ($ millions)** | $20.0 | $30.0 | $40.0 || **Interest Expense ($ millions)** | $12.8 | $14.4 | $16.0 |#### Instructions- Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55.- Do not round intermediate calculations. Round your answers to two decimal places. Sure! Here is the transcription suitable for an educational website:---1. What is Sheldon's unlevered horizon value of operations at Year 3? - $ ___ million2. What is the current unlevered value of operations? - $ ___ million3. What is the horizon value of the tax shield at Year 3? - $ ___ million4. What is the current value of the tax shield? - $ ___ million5. What is the current total value of the company? - $ ___ million---Note: The text is presented as a series of financial questions focused on unlevered values and tax shields, essential for understanding enterprise valuation. The placeholders are meant for inputting specific financial values.

We have to find the value of a levered firm using compressed APV equation. For this, we will have to find the value of the unlevered firm and the PV of interest tax shields.Let Ci, Ii and ITSi be the free cash flow, interest expense and interest tax shield in year i respectively. Discount rate, r = cost of unlevered equity = 15% Tax rate, T = 25% Growth rate, g = 5%Unlevered horizon value, HVU =C3×(1+g)(r-g)=40×(1+5%)(15%-5%)=420.00 Current unlevered value, VU =C1×(1+r)-1+C2×(1+r)-2+(C3+ HVU)×(1+r)-3=20×(1+15%)-1+30×(1+15%)-2+(40+420)×(1+15%)-13=342.53Horizon value of tax shields at the end of year 3, HVITS =ITS3×(1+g)(r-g)=I3×T×(1+g)(r-g)=16×25%×(1+5%)(15%-5%)=42.00 Current value of the tax shields, VITS =ITS1×(1+r)-1+ITS2×(1+r)-2+(ITS3+ HVITS)×(1+r)-3=I1×T×(1+r)-1+I2×T×(1+r)-2+(I3×T+ HVITS)×(1+r)-3=12.8×25%×(1+15%)-1+14.4×25%×(1+15%)-2+(16×25%+42)×(1+15%)-13=35.75Current total value of the levered company =VU+V=342.53+35.75=378.28Final answers: Unlevered horizon value at the end of year 3 = $ 420.00 million Current unlevered value = $ 342.53 million Horizon value of tax shields at the end of year 3 = $ 42.00 million Current value of the tax shields = $ 35.75 million Current total value of the levered company = $ 378.28 million

Answered: Compressed APV with Nonconstant Growth…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Compressed Adjusted Present Value Schwarzentraub Corporation's expected free cash flow for the year is $300,000; in the future, free cash flow is expected to grow at a rate of 8%. The company currently has no debt, and its cost of equity is 12%. Its tax rate is 25%. Suppose the firm issues $3 million debt at a rate of 8%. Use the compressed adjusted value approach to answer the following questions. Do not round intermediate calculations. Find Vu. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. $ Find VL. Use the APV model that allows for growth. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to two decimal places. $ million % million Find rsL. Use the APV model that allows for growth. Round your answer to one decimal place.
Residual Distribution Model Puckett Products is planning for $2 million in capital expenditures next year. Puckett's target capital structure consists of 55% debt and 45% equity. If net income next year is $1 million and Puckett follows a residual distribution policy with all distributions as dividends, what will be its dividend payout ratio? Round your answer to two decimal places. ___%
Unlevered Value Richter Manufacturing has a 10% unlevered cost of equity. Richter forecasts the following free cash flows (FCFS), which are expected to grow at a constant 2% rate after Year 3. Year 2 $755 What is the horizon value of the unlevered operations? Do not round intermediate calculations. Round your answer to the nearest dollar. FCF Year 1 $720 $ Year 3 $820 What is the total value of unlevered operations at Year 0? Do not round intermediate calculations. Round your answer to the nearest dollar.
Excel Project and Excel Solution Ten annual returns are listed below.-19.9% 16.6% 18.0%-50.0% 43.3% 1.2%-16.5% 45.6% 45.2%-3.0% What is the arithmetic average return over the 10-year period? What is the geometric average return over the 10-year period? If you invested $100 at the beginning of the period, how much would you have at the end?
Intro Nickelon's free cash flow during the current year is $150 million, which is expected to grow at a constant rate of 5% in the future. The weighted average cost of capital is 11%. Part 1 What is the firm's total corporate value (in $ million)? 0+ decimals Submit
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2. Calculating Project NPV The Fleming Company is considering a new investment. Financial projections for the investment are tabulated below. The corporate tax rate is 22 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project. Investment Sales revenue Operating costs Depreciation Net working capital spending Year 0 $32,800 450 Year 1 Year 2 Year 3 Year 4 $14,200 2,100 8,200 175 $15,900 $15,700 2,100 2,100 8,200 8,200 250 275 $12,900 2,100 8,200 ? a. Compute the incremental net income of the investment for each year. b. Compute the incremental cash flows of the investment for each year. c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
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