78106_21_Web_Ch21A_p01-06

78106_21_Web_Ch21A_p01-06 - WEB EXTENSION 21A Projecting...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
WEB EXTENSION 21A Projecting Consistent Debt and Interest Expenses P rojecting financial statements for a merger analysis requires explicit assumptions regarding the capital structure in the post-merger years. This extension shows how to project debt and interest expenses that are consistent with the capital structure assumptions. Refer to the worksheet Web 21A in the file Ch21 Tool Kit.xls for all calculations. 21.1 P ROJECTING C ONSISTENT D EBT AND I NTEREST E XPENSES W HEN C APITAL S TRUCTURE I S C ONSTANT Recall that the APV model and the FCFE model both require a projection of interest expense. If the projected interest expense is not consistent with the assumed constant capital structure, then the APV and FCFE models will produce incorrect answers. This section will show how the debt levels and interest expenses in Table 21-3 in the text were constructed in a manner consistent with the assumed constant capital structure. Keep in mind, though, that if the capital structure is assumed to be con- stant, then it is always easier to use the corporate valuation model than either the APV model or the FCFE model. There are five steps required to project debt levels that are consistent with the assumed constant capital structure. 1. Use the techniques of Chapter 12 to project the operating items on the financial statements needed to calculate free cash flows. Notice that these projections don t depend on the capital structure because they are for operating items, not financial items. 2. Calculate the WACC that corresponds to the constant target capital structure. 3. Calculate the horizon value of operations using the corporate valuation model s horizon value formula. 4. Calculate the value of operations in each year of the projections as the present value of the next year s value of operations and the next year s free cash flows. 5. Calculate the projected debt level by multiplying the value of operations by the percent of debt in the assumed constant capital structure. If we assume that all debt is added at the end of the year, then the projected interest expense in any year is the projected interest rate multiplied by the projected amount of debt at the beginning of the year. resource See the worksheet Web 21A in Ch21 Tool Kit.xls on the textbook s Web site for calculations. 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Step 1. Project Operating Items and Calculate Free Cash Flow The worksheet Web 21A in the file Ch21 Tool Kit.xls shows the projected financial statement items related to Tutwiler Controls s operations and its projected free cash flows. The free cash flows are shown here in the first row of Table 21A-1. The fol- lowing sections explain the other rows of Table 21A-1. Step 2. Use the Target Capital Structure to Calculate
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/03/2010 for the course FRR 3032 taught by Professor Mr.wroshr during the Spring '10 term at Crafton Hills College.

Page1 / 6

78106_21_Web_Ch21A_p01-06 - WEB EXTENSION 21A Projecting...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online