fm17 23 - The Value Of U = Expected FCF(WACC g =...

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Mini Case: 17 - 23 The Value Of U = Expected FCF/(WACC – g) = 250,000/(0.14 – 0.07) = $3,571,429 Which is greater than in part C because the firm is growing. If there is $1,000,000 in debt then: The value of l = the value of U + value of debt tax shield The value of the (growing) debt tax shield = r d TD/(r sU – g) = 0.08(0.40)(1,000,000)/(0.14 – 0.07) = $457,143 Therefore, the value of the firm = $3,571,429 + $457,143 = $4,028,571. The value of the equity is the value of the firm less the value of the debt = $4,028,571 - $1,000,000 = $3,028,571. In this case the increase in the firm’s value due to the debt tax shield as a percent of its zero debt value is $457,143/$3,571,429 = 12.80% This is less than the increase in the non-growing firm’s value as calculated using the MM model: $400,000/$2,142,857 = 18.7%. To calculate the new levered cost of equity: r sL = r sU + (r sU – r d )(D/S) = 14% + (14% - 8%)(1,000,000/3,028,571) = 15.98% And the new levered WACC: WACC L = (D/V)r
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