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Solution
Chapter: 21
Problem: 8
INPUTS (In millions) Projected
Year 1 2 3 4
Free cash flow $200.0 $280.0 $320.0 $340.0
Interest expense $100.0 $120.0 $120.0 $140.0
Long-term growth rate 5%
Tax rate 40%
Unlevered cost of equity 12.00%
Current
1 2 3
Free cash flow $200.0 $280.0 $320.0
Horizon unlevered value of operations
Current value of unlevered operations $4,086.77
Current
1 2 3
Interest expense $100.0 $120.0 $120.0
Tax savings $40.0 $48.0 $48.0
Horizon unlevered value of operations
Current value of unlevered operations $677.57
Unlevered value of operations $4,086.77
Value of tax shield $677.57
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.
a. Calculate the estimated horizon value of the tax shield at Year 4 (i.e., immediately after the Year-4 free
Projected
d. Calculate the current value of the tax shield.
d. Calculate the current total value.
b. Calculate the current value of unlevered operations.
Projected
a. Calculate the estimated horizon value of unlevered operations at Year 4 (i.e., immediately after the Year-4
free cash flow).
Total value $4,764.34
7/16/2015
4
$340.0
$5,100.00
4
$140.0
$56.0
$840.00
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.
a. Calculate the estimated horizon value of the tax shield at Year 4 (i.e., immediately after the Year-4 free
Projected
d. Calculate the current value of the tax shield.
d. Calculate the current total value.
b. Calculate the current value of unlevered operations.
Projected
a. Calculate the estimated horizon value of unlevered operations at Year 4 (i.e., immediately after the Year-4
free cash flow).
