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Unformatted text preview: R E = R A +D/E (R A-R D )(1-T C ) R A =R U R i = R f + B i (R M-R f ) MRP= (R M-R f ) M&M I M&M II No Taxes: V L =V U R E = R u +(R u-R D )(D/E) With Taxes: V L =V U + T c D R E = R u +(R u-R D )(D/E)(1-T c ) WACC= (E/V)R E +(D/V)R D (1-T C ) If leverage Changes so does cost of Equity, Cost of Debt B E = B A +(B A-B D )(D/E)(1-T c ) Always Average Beta of Assets not Beta of Equity V u = (FCF)/(R A )=EBIT(1-T C )/R A V L = (EBIT(1-T c ))/(WACC)=(FCF)/(WACC) V L = V u +PVTS PVTS=T C D Sales Growing Perp.=FCF(1+G)/(WACC-G)-Costs of Goods Sold EBITDA=Sales-Costs of Goods Sold-Depreciation EBIT-Taxes =(T C )(Ebit) EBIT(1-T C ) + Depreciation-Capital Expenditure- Increase in Working Capital Free Cash Flows Survivorship bias: only firms that survived are used to construct market risk premium so may be overstated Equity risk premium: 4-5% globalization, fewer trade barriers, increased productivity Continuation value is most important # in valuation—very sensitive to growth rate (do sensitivity...
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