
a.
To calculate: Company FS pre-merger unlevered horizon value. Also, the Year 0 unlevered value.
a.

Explanation of Solution
Given information:
Company FS pre-merger unlevered
Pre-tax cost of debt: 6%
Tax rate: 25%
Terminal growth rate of
Company FS outstanding shares: 800 million
Calculation of Horizon value of unlevered operations (HVUL) pre-merger:
Formula to calculate HVUL:
Substitute $2,000 for free cash flow in year 4, 5% for terminal growth rate of free cash flow and 8% for
Hence, the HVUL is $70,000.
Calculation of year 0 unlevered value:
b.
To calculate: Company FS pre-merger horizon value tax shield. Also, calculate year 0 tax shield value.
b.

Explanation of Solution
Calculation of tax shield:
Particulars | Year 1($) | Year 2($) | Year 3($) | Year 4($) |
Interest | 474 | 486 | 492 | 498 |
Tax shield | 118.50 | 121.50 | 123.00 | 124.50 |
Calculation of Horizon value of tax shield (HVTS):
Formula to calculate HVTS:
Substitute $124.50 for tax shield, 5% for terminal growth rate of free cash flow and 8% for
Hence, the HVTS is $4,357.50.
Calculation of year 0 tax shield value:
c.
To calculate: Company FS pre-merger value of levered operations and value of equity. Also compute the minimum stock price.
c.

Explanation of Solution
Calculation of value of levered operations:
Hence, value of levered operations is $61,061.05.
Calculation of value of equity:
Hence, value of equity is $53,361.05.
Calculation of stock price:
Hence, minimum stock price is $66.70 per share.
d.
To calculate: Company FS post-merger unlevered horizon value to Company CR. Also, compute year 0 unlevered value.
d.

Explanation of Solution
Calculation of Horizon value of unlevered operations (HVUL) post-merger:
Formula to calculate HVUL:
Substitute $2,200 for free cash flow in year 4, 5% for terminal growth rate of free cash flow and 8% for
Hence, the HVUL is $77,000.
Calculation of year 0 unlevered value:
e.
To calculate: Company FS post-merger horizon value tax shield. Also, calculate year 0 tax shield value.
e.

Explanation of Solution
Calculation of tax shield:
Particulars | Year 1($) | Year 2($) | Year 3($) | Year 4($) |
Interest | 1,320 | 1,338 | 1,344 | 1,350 |
Tax shield | 330.00 | 334.50 | 336.00 | 337.50 |
Calculation of Horizon value of tax shield (HVTS):
Formula to calculate HVTS:
Substitute $337.50 for tax shield, 5% for terminal growth rate of free cash flow and 8% for
Hence, the HVTS is $11,812.50.
Calculation of year 0 tax shield value:
f.
To calculate: Company FS post-merger value of levered operations and value of equity. Also compute the minimum stock price.
f.

Explanation of Solution
Calculation of value of levered operations:
Hence, value of levered operations is $72,959.83.
Calculation of value of equity:
Hence, value of equity is $65,259.83.
Calculation of stock price:
Hence, maximum stock price is $81.57 per share.
g.
To calculate: The percentage of Company FS pre-merger and post-merger capital structure at year 4 consisted of debt. Also, the increase in value to Company CR due to improved free cash flow.
g.

Explanation of Solution
Calculation of pre-merger capital structure consisted of debt:
Hence, Company FS consisted of 11.2% of debt in its overall capital structure.
Calculation of post-merger capital structure consisted of debt:
Hence, Company FS consisted of 25.3% of debt in its overall capital structure.
Calculation of increase in the value due to free cash flows:
Hence, increase in value due to free cash flows is $5,715.04.
Calculation of increase in value due to change in capital structure:
Hence, increase due to change in capital structure is $6,183.74.
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Chapter 22 Solutions
Financial Management: Theory & Practice
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