### 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

See similar textbooks

Similar questions

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?
Ñ5
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
Please solve subpart A,B max 30-45 minutes thank u AmN companies will get capital from several options where the total funds must be obtained of 1.1 billion rupiah. The following is currently available market information:1. Debt interest rate is 12% per year2. State Bonds with minimal risk (risk free) of 5%3. JCI has a market return of 8%4. The company tax applied is 25%5. The company's performance is good so it has a stock Beta of 1.12The available options relate to the source of AmN's company capital, namely from Debt (direct tobank) and Equity (through ordinary shares) with the following explanation:1. Fully capital obtained from debt2. Fully capital obtained from equity3. The DER policy applied is 1/3 (or DER = 0.3333) Based on the narrative above you are asked to:A. Calculate WACC from the three available optionsB. Decide on the best choice with the reasons.
Please do not give solution in image format thanku
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?
Assuming ABC Ltd’s free cash flow is R45 000 in year one and grows at a constant rate of 5% p.a. for years 2 through to year 5. After year 5 the free cash flows grow at 3% into perpetuity. Calculate the present value of the “terminal value” free cash flow (excluding the present value of cash flows for years 1 to 5). The cost of capital for ABC Ltd is 12%. Assume cash flows are earned at the end of the period. Use full years in your discounting calculations. Group of answer choices R317,143 R362,373 R355,201 R424,308
5
55

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS