AN EXERCISE IN ESTABLISHING CASH FLOW VALUATIONS Fact Pattern: EBITDA (pre-tax cash flow from operations) $25,000,000 Depreciation and Amortization (non-cash expenses) 2,500,000 Interest Expense 4,000,000 Income Taxes 40% Forecasted annual Capital Expenditures 3,000,000 Forecasted annual increases in Net Working Capital 1,800,000 Forecasted annual increases in long-term debt 2,500,000 Risk-free rate of return 6.00% Market risk-premium (S&P 500) 8.50% Interest Rate on Corporate long-term debt 8.00% Systematic Risk coefficient (reflective of operating and financial risk) 1.00 Bidders expectations on target companys debt/capital proportion 40.00% Bidders expectations on long-term growth expectations 5.00% Required: 1) Establish the respective required returns for: a: Expected Asset Return b: Expected Equity Return c: Expected Return on all Invested Capital 2) Establish the respective values for: a: All Invested Capital (using CCF and WACC and APV) b: The Firms Equity Capital Please note that the results may not be precisely the same, but close enough to support your argument that all valuation models will lead to a reasonably identical value. It may be assumed that if Debt is not intended to be a constant dollar amount, then it may be assumed that the cash flows derived from the interest tax shield are as risky as the overall firms cash flows.