fcashflow - FREE CASH FLOW VS. CASH FLOWS TO SHAREHOLDERS...

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FREE CASH FLOW VS. CASH FLOWS TO SHAREHOLDERS Page 1 DATA Cost of debt 10% EBIT 6.00 Tax rate 40% Investment 12.00 Cost of equity 12% Amount borrowed 4.00 CASH FLOWS TO SHAREHOLDERS Year 0 1 2 3 Goes on forever EBIT 6.00 6.00 6.00 Less interest (0.40) (0.40) (0.40) Earnings before taxes 5.60 5.60 5.60 Taxes (2.24) (2.24) (2.24) Net income 3.36 3.36 3.36 Investment by shareholders (8.00) - - - Net cash flow to shareholders (8.00) 3.36 3.36 3.36 NPV at cost of equity 20.00 Market value of equity 28.00 WEIGHTED AVERAGE COST OF CAPITAL Proportion Weighted Cost of of Market Cost of Capital Value Capital Debt (after-tax) 6.0% 12.5% 0.8% Equity 12.0% 87.5% 10.5% Weighted average cost of capital 11.3% FREE CASH FLOW Year 0 1 2 3 Goes on forever EBIT 6.00 6.00 6.00 Taxes (2.40) (2.40) (2.40) EBIAT 3.60 3.60 3.60 Investment (12.00) - - - Free cash flow (12.00) 3.60 3.60 3.60 NPV at WACC 20.00 Year 0 1 2 3 Goes on forever Interest (0.40) (0.40) (0.40) Interest tax shield 0.16 0.16 0.16 After-tax interest
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This note was uploaded on 06/28/2010 for the course MKTG 00HP01 taught by Professor Himanshu during the Spring '10 term at Indiana Institute of Technology.

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fcashflow - FREE CASH FLOW VS. CASH FLOWS TO SHAREHOLDERS...

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