FINANCIAL MANAGEMENT(LL)-TEXT
16th Edition
ISBN: 9781337902618
Author: Brigham
Publisher: CENGAGE L
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Chapter 21, Problem 10SP
a.
Summary Introduction
To calculate:
Horizon value at year 4
b.
Summary Introduction
To calculate:
Current unlevered value of operations
c.
Summary Introduction
To calculate:
Horizon value of tax shield at year 3
d.
Summary Introduction
To calculate:
Current value of tax shield
e.
Summary Introduction
To calculate:
Current total value
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Start with the partial model in the file Ch21 P08 Build a Model.xlsx on the textbook’s Web site. Kasperov Corporation has an unlevered cost of equity of 12% and is taxed at a 40% rate. The 4-year forecasts of free cash flow and interest expenses are shown in the following table; free cash flow and interest expenses are expected to grow at a 5% rate after Year 4. Using the compressed APV model, answer the following questions.
INPUTS (In Millions)
Projected
Year:
1
2
3
4
Free cash flow
$200
$280
$320
$340
Interest expense
$100
$120
$120
$140
Calculate the current value of unlevered operations.
Calculate the estimated horizon value of the tax shield at Year 4 (i.e., immediately after the Year-4 free cash flow).
Calculate the current value of the tax shield.
Calculate the current total value.
A company forecasts free cash flow of $400 at Year 1 and $600at Year 2; after Year 2, the FCF grow at a constant rate of 5%.The company forecasts the tax savings from interest deductionsas $200 in Year 1, $100 in Year 2; after Year 2, the tax savingsgrow at a constant rate of 5%. The unlevered cost of equityis 9%. What is the horizon value of operations at Year 2?($15,750.0) What is the current unlevered value of operations?($14,128.4) What is the horizon value of the tax shield at Year 2?($2,625.0) What is the current value of the tax shield? ($2,477.1)What is the levered value of operations at Year 0? ($16,605.5)
Corona Cookies has a book value of equity of $11,000.Residual income one year from now is expected to be $500.Residual income is expected to grow at 1.5% annually, forever. If the correct required return is 17%,What is the value of Corona according to the residual income model?
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Chapter 21 Solutions
FINANCIAL MANAGEMENT(LL)-TEXT
Ch. 21 - Prob. 1QCh. 21 - Modigliani and Miller assumed that firms do not...Ch. 21 -
An unlevered firm has a value of $500 million. An...Ch. 21 -
An unlevered firm has a value of $500 million. An...Ch. 21 - Prob. 3PCh. 21 - Prob. 4PCh. 21 - A company’s most recent free cash flow to equity...Ch. 21 - Air Tampa has just been incorporated, and its...Ch. 21 - Companies U and L are identical in every respect...Ch. 21 - Schwarzentraub Corporation’s expected free cash...
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