Consider a firm F with the following features Firm F will close its business at
ID: 2787973 • Letter: C
Question
Consider a firm F with the following features Firm F will close its business at time 20 Earnings before interest and taxes (EBIT) is 200 at time 1, 400 at time 2, and then it grows every year at a rate of 5% until time 20. Amortization is worth 100 at time 1, 150 at time 2, and then it decreases every year at a rate of 6% until time 20. Capital expenditure (CAPEX) is 40 at time 1, 2, . 20. . Net working capital (NWC) is 100 today, 150 at time 1, and 280 at time 2. From time 3 to time 20, change in NWC is worth 80. Bankruptcy costs are expected to be 500 at time 20. ·The cost of unlevered equity is 7%. . Debt consists of a bond with face value 1000. Coupon payments are made at time 2, , 20. Today's value of the bond is 1000, Cost of debt is 1%. ·The corporate tax rate is 20% Remark: The notation t+ stands for time t right after cash-flows have been paid. 1) What is the coupon rate of the bond (cB)? 2) What is the value, at time 2+, of firm F's tax shields (TS2+)? 3) What is the value, at time 2+, of a security that pays the EBIT ( BIT)? Hint: Discount cash-flows using the cost of unlevered equity. 4) What is the value, at time 2+, of a security that pays the amortization (V ")? Hint: Discount cash-flows using the cost of unlevered equity. 5) What is the value, at time 2+, of a security that pays the CAEXVPEX)? Hint: Discount cash-flous using the cost of unlevered equity.Explanation / Answer
Answers Formulae Calculation 1 Coupon Rate = Sumof Coupon Payment/Face Value of Bond *100 20% 2 Value of Firms Tax Shield at time t2+ is PV of benefit/ saving of tax because of Depreciation/Amortization, Interest. Tax Shield Interest (A) Amortization (B) Total (A+B) Tax Savings (A+B)*20% PVF at 7% PV 1 10 100 110 22 0.93 20.56 2 10 150 160 32 0.87 27.95 Tax Shield 54 PV of Tax Shield 48.51 3 Value of Security at t2 = PV of EBIT at Year 2 =200*0.93+400*0.87 534 4 Value of Security at t2 = PV of Amortization at Year 2 =100*0.93+150*0.87 224 5 Value of Security at t2 = PV of Capex at Year 2 =40*0.93+40*0.87 72 6 Value of Security at t2 = PV of Change in NPV at Year 2 =50*0.93+130*0.87 144 7 Value of Security at t2 = PV of Bankrupcy in NPV at Year 2 =500*0.87 435 (Assuming Bankrupcy is received at year 2 only) 8 Value of Security at t2 = PV of CashFlow in NPV at Year 2 =140*0.93+350*0.87 434.7 (Assuming No Debt) 9 Value of Firm at t2 = PV of CashFlow in NPV at Year 2 =140*0.93+350*0.87 1434.7 Value of Firm = PV of Cash Flow + Debt 10 Firms Tax Shield +PV of (Interest + Amortization)*PVF for 20 years 237.1 11 Value of Security for t20 = PV of EBIT from Year 1-20 See table below 4463.1 12 Value of Security at t20 = PV of Amortization at Year 2 See table below 1,080 13 Value of Security at t20 = PV of Capex at Year 2 See table below 424 14 Value of Security at t20 = PV of Change in NPV at Year 2 See table below 863 15 Value of Firm at t20 = PV of CashFlow in NPV at Year 2 =4463+1000 5463 16 Value of Firm at t20 = PV of CashFlow in NPV at Year 2 =5463-500*0.258419 -129 Cash Flow = EBIT-Tax- Incremental WC -Capex+Depreciation & Amortization t EBIT Amortization Capex NWC Change in NPV Debt Interest Tax Cash Flow PVF @7% PV PV OF Firm Tax Shield 0 100 1000 1 200 100 40 150 50 10 40 140 0.934579 130.84 21 2 400 150 40 280 130 10 80 350 0.873439 305.70 28 3 420 141 40 360 80 10 84 357 0.816298 291.42 25 4 441 133 40 440 80 10 88 365 0.762895 278.72 22 5 463 125 40 520 80 10 93 375 0.712986 267.39 19 6 486 117 40 600 80 10 97 386 0.666342 257.26 17 7 511 110 40 680 80 10 102 398 0.62275 248.16 15 8 536 103 40 760 80 10 107 412 0.582009 239.97 13 9 563 97 40 840 80 10 113 428 0.543934 232.56 12 10 591 91 40 920 80 10 118 444 0.508349 225.82 10 11 621 86 40 1000 80 10 124 462 0.475093 219.67 9 12 652 81 40 1080 80 10 130 482 0.444012 214.03 8 13 684 76 40 1160 80 10 137 503 0.414964 208.83 7 14 718 71 40 1240 80 10 144 526 0.387817 204.02 6 15 754 67 40 1320 80 10 151 551 0.362446 199.53 6 16 792 63 40 1400 80 10 158 577 0.338735 195.33 5 17 832 59 40 1480 80 10 166 605 0.316574 191.39 4 18 873 56 40 1560 80 10 175 634 0.295864 187.65 4 19 917 52 40 1640 80 10 183 666 0.276508 184.11 3 20 963 49 40 1720 80 10 193 699 0.258419 180.73 3 200 4,463.1 237.1 Ke (Unlevered) 7% 20%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.