HCB\'s most recent and projected financial statements and projected free cash fl
ID: 2795397 • Letter: H
Question
HCB's most recent and projected financial statements and projected free cash flow are shown below. All items are expected to grow at 5% after the last year of projections.
2017 2018E 2019E
Debt $40.00 $47.00 $53.00
Interest expense $2.80 $3.30 $3.70
Free cash flow $17.00 $14.00 $22.00
Tax rate 40%
WACC 8%
Levered required return on equity 12%
Unlevered required return on equity 10%
growth rate after 2019 5%
26. Calculate the value of HCB's tax shields as of the end of 2017??
27.Using the APV model, calculate the intrinsic value of HCB's equity as of the end of 2017??
28. Using the FCFE model, calculate the intrinsic value of HCB's equity as of the end of 2017??
Explanation / Answer
HCB's tax shield at the end of year 2017= Interest expense* tax rate= 2.8* 0.4= 1.12$ million.
2. Adjusted Present value= Value of unlevered firm+ PV of tax shield of interest= 17/0.10+ 1.12$ M= 171.12$ Million.
3. Intrinsic value using FCFE model= FCFE1/ ke-g
14/0.12- 0.05= 200$ million.
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