A 1 Exam 3 Problem 4 2 3 4 6 7 8 9 B C D E F G H J Kasperov Corporation has an unlevered cost of equity of 12% and is taxed at a 25% rate. The 4-year forecasts of free cash flow and interest expenses are shown in the following table; free cash flow and interest expenses are expected to grow at a 5% rate after Year 4. Using the compressed APV model, answer the following questions. 10 11 INPUTS (In millions) Projected 12 13 Free cash flow 14 Interest expense 15 Year 1 2 3 4 $200.0 $100.0 $280.0 $320.0 $340.0 $120.0 $120.0 $140.0 16 Long-term growth rate 17 Tax rate 18 Unlevered cost of equity 19 5% 25% 12.00% 20 a. Calculate the estimated horizon value of unlevered operations at Year 4 (i.e., immediately after the Year-4 free 21 cash flow). 22 23 24 Current 0 1 Projected 2 3 $200.0 $280.0 $320.0 25 Free cash flow 26 Horizon unlevered value of operations 27 28 b. Calculate the current value of unlevered operations. 29 30 Current value of unlevered operations $4,086.77 31 4 $340.0 $5,100.00 32 33 a. Calculate the estimated horizon value of the tax shield at Year 4 (i.e., immediately after the Year-4 free cash 34 35 36 37 Interest expense 38 Tax savings 39 Horizon unlevered value of operations 40 41 d. Calculate the current value of the tax shield. 42 43 Current value of the tax shield 44 45 46 d. Calculate the current total value. 47 48 Unlevered value of operations 49 Value of tax shield 50 51 52 53 Total value Current 0 Projected 1 2 3 4 $100.0 $120.0 $25.0 $30.0 $120.0 $30.0 $140.0 $35.0 $36.75