4/19/2010
Chapter 21.
2107 Build a Model
2011
2012
2013
2014
2015
Net sales
$500
$600
$700
$760
$806
Selling and administrative expense
60
70
80
90
96
Interest
30
40
45
60
74
Tax rate of ACC before the merger
30%
Tax rate after merger
35%
Cost of goods sold as a % of sales
65%
Debt ratio (percent financed with debt) before the merger
30%
Cost of debt before merger
9%
Debt ratio (percent financed with debt) after the merger
40%
Cost of debt after merger
10%
Beta of ACC
1.40
Riskfree rate
7%
Market risk premium
6.5%
Terminal growth rate of free cash flow
6.0%
Premerger debt (in thousands)
$400
a.
What is the unlevered cost of equity?
The unlevered cost of equity should be used to discount the FCFs, tax shields and horizon value.
Step 1: Find the levered cost of equity at old capital structure.
Step 2: Find the unlevered cost of equity.
2011
2012
2013
2014
2015
Sales
Cost of Goods Sold (incl. depreciation)
Gross Profit
Selling/admin. costs
EBIT
Interest
EBT
Taxes
Net Income
EBIT
NOPAT
Investment in net operating capital
FCF
We must determine the tax shields.
From this point, we can derive horizon value from the basic DCF framework.
The tax shield is the interest multiplied by the postmerger tax rate.
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This note was uploaded on 10/22/2011 for the course ACCOUNTING 1102 taught by Professor Borges during the Spring '11 term at InterAmerican Recinto Metropolitano.
 Spring '11
 Borges

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