7-1_7-3sol - Problem 7.1 Traditional WACC Valuation Given...

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Given Solution Legend Debt beta 0.20 = Value given in problem Levered equity beta 1.60 = Formula/Calculation/Analysis required Market Risk Premium 5% = Qualitative analysis or Short answer required Risk free rate 7% = Goal Seek or Solver cell Borrowing rate (before tax) 8% = Crystal Ball Input Tax rate 30.00% = Crystal Ball Output Solution After-tax cost of debt 5.60% Levered cost of equity 15.00% Years 1 2 3 4 Sales \$100,000.00 \$100,000.00 \$100,000.00 \$100,000.00 Operating income (Earnings Before Interest and Taxes) 22,000.00 22,000.00 22,000.00 22,000.00 Less: Cash tax payments \$(6,600.00) \$(6,600.00) \$(6,600.00) \$(6,600.00) Net operating profits after taxes (NOPAT) 15,400.00 15,400.00 15,400.00 15,400.00 Plus: Depreciation expense \$8,000.00 \$8,000.00 \$8,000.00 \$8,000.00 Less: Investments in Net Working Capital - - - - in new Capital (CAPEX) (8,000.00) (8,000.00) (8,000.00) (8,000.00) Total net investment for the period \$(8,000.00) \$(8,000.00) \$(8,000.00) \$(8,000.00) Firm free cash flow (FFCF) \$15,400.00 \$15,400.00 \$15,400.00 \$15,400.00 Equity Free Cash Flow Calculation 1 2 3 4 (Firm) Free Cash Flow 15,400.00 15,400.00 15,400.00 15,400.00 Less: Interest (1 - Tax Rate) (1,400.00) (1,400.00) (1,400.00) (1,400.00) (Equity) Free Cash Flow \$14,000.00 \$14,000.00 \$14,000.00 \$14,000.00 Debt Valuation Problem 7.1: Traditional WACC Valuation a. What is Canton's cost of equity capital? What is the after-tax cost of debt for the firm? b. Calculate the equity free cash flows for Canton for each of the next four years.

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Present value of interest for Years 1-4 \$6,624.25 Present value of principal in Year 4 18,375.75
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7-1_7-3sol - Problem 7.1 Traditional WACC Valuation Given...

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