Lecture6 - GM apv question

# Financing side effects 3 15yearregularbondfor40000at14

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Unformatted text preview: ng COGS=50% of sales to get: Year Year 1 2 3 4 5 6 7 . . . + EBIT(1­t) 5,280 5,282 5,612 7,262 7,407 7,555 7,706 . . . +Depr 1,000 1,000 1,000 1,000 ­ ­ ­ . . . =OCF 6,280 6,282 6,612 8,262 7,407 7,555 7,706 . . . ­ ΔNWC (500) (500) (500) (500) ­ ­ ­ . . . ­Capex (1,000) (1,000) (1,000) (1,000) ­ ­ ­ . . . =UCF 4,780 4,782 5,112 6,762 7,407 7,555 7,706 . . . 0.0% 6.9% 32.3% 9.5% 2.0% 2.0% . . . %ΔUCF PVU = 4,780/1.072 + 4,782/1.0722 + 5,112/1.0723 + 6,762/1.0724 + 7,407/1.0725 + (1/1.0725)x7,555/(.072-.02) = \$124,747 Chrysler’s management adds \$27,674 to Delphi’s all-equity value 13 3. Financing-Side Effects 3. 15­year regular bond for \$40,000 at 14% – Flotation costs – Tax shields 10­year govt. sponsored bond for \$20,000 at 8% – No flotation costs – Tax shields + subsidy Increase in financial distress costs 14 Regular bond – Flotation Costs Flotation costs (FC) are 2% of the \$40,000 raised, and can be amortized straight­line over 15 years FC = 0.02x40,000 = \$800 A(1...
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