727: FINC Corporate transactions and business valuation
Professor Robert Hansen
Assignment 1. CAPM and WACC in valuation
BLAZER TELECOM s has perpetual earnings before interest and taxes of $400, the corporate tax rate is 40%. BLAZER uses a debt-to-equity ratio of 0.75. The debt is priced to yield the risk-free rate of interest. BLAZER's depreciation expenses are not tax deductible and just offset capital expenditures in each year, and changes in working capital are zero. BLAZER has a 100% payout policy. The risk-free interest rate is 8% and the market premium (market rate less the risk-free rate) is 8.5%. We don t know BLAZER's asset beta, but we believe Comp Co. s assets have the same risk as BLAZER. We know the following about Comp Co.: it debt value is $13,945, its market value of equity value $7,000, is its tax rate is 36%, its debt beta is 0.3725, and its equity beta is 1.80.
(Note: The expected return on any asset i can be measured using the CAPM, R i = R F + [R M - R F ] , where RM RF is the market premium .)
A. Complete the following table entries (Excel is available on the course web page).
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FINC 727: Corporate transactions and business valuation
Professor Robert Hansen
0 annual cash flows EBIT interest EBT Taxes NI Dep CAPEX Change in WC Avail cash flow Equity cash flow annual debt schedule Beginning debt Principal payments Debt terminal value estimates Firm Value Debt Equity annual discounting Debt/capital Equity/capital Asset beta All equity WACC Debt beta Equity beta Cost of equity Cost of debt WACC-cost of capital
End of year 1 2 $400.00 $400.00
3 $400.00
4 $400.00
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