Attached are the answers too. Explain what formulas were used? This process tells us where the change
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Attached are the answers too. Explain what formulas were used?
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This process tells us where the change in value is going, but it sheds little light on where the change is coming from. Let's divide the free cash flows of the firm into pure business flows and cash flows resulting from financing effects. Now, an axiom in finance is that you should discount cash flows at a rate consistent with the risk of those cash flows. Pure business flows should be discounted at the unlevered cost of equity (i.e., the cost of capital for the unlevered firm). Financing flows should be discounted at the rate of return required by the providers of debt. Pure Business Cash Flows: EBIT Taxes (@34%) EBIAT +Depreciation Capital Exp. Cash Flow Unlevered Beta Risk-Free Rate Market Premium Unlevered WACC Value of Pure Business Flows: (CF/Unlevered WACC) Financing Cash Flows Interest (from Prob. 2) Tax Reduction Pretax Cost of Debt Value of Financing Effect: (Tax Reduction/Pretax Cost of Debt) Total Value (Sum of Values of Pure Business Flows and Financing Effects) 0% Debt/ 100% Equity $ S S S S S 1,485.00 504.90 980.10 500.00 (500.00) 980.10 0.80 5.00% 6.00% 9.800% 5.00% 0 0 25% Debt/ 75% Equity S S S S S 1,485.00 504.90 980.10 500.00 (500.00) 980.10 0.80 5.00% 6.00% 9.800% [1] [ 5.00% 50% Debt/ 50% Equity S 1,485.00 S 504.90 980.10 500.00 (500.00) 980.10 555 S S S SS S 0.80 5.00% 6.00% 9.800% 10 0 5.00% This process tells us where the change in value is going, but it sheds little light on where the change is coming from. Let's divide the free cash flows of the firm into pure business flows and cash flows resulting from financing effects. Now, an axiom in finance is that you should discount cash flows at a rate consistent with the risk of those cash flows. Pure business flows should be discounted at the unlevered cost of equity (i.e., the cost of capital for the unlevered firm). Financing flows should be discounted at the rate of return required by the providers of debt. Pure Business Cash Flows: EBIT Taxes (@34%) EBIAT +Depreciation Capital Exp. Cash Flow Unlevered Beta Risk-Free Rate Market Premium Unlevered WACC Value of Pure Business Flows: (CF/Unlevered WACC) Financing Cash Flows Interest (from Prob. 2) Tax Reduction Pretax Cost of Debt Value of Financing Effect: (Tax Reduction/Pretax Cost of Debt) Total Value (Sum of Values of Pure Business Flows and Financing Effects) 0% Debt/ 100% Equity $ S S S S S 1,485.00 504.90 980.10 500.00 (500.00) 980.10 0.80 5.00% 6.00% 9.800% 5.00% 0 0 25% Debt/ 75% Equity S S S S S 1,485.00 504.90 980.10 500.00 (500.00) 980.10 0.80 5.00% 6.00% 9.800% [1] [ 5.00% 50% Debt/ 50% Equity S 1,485.00 S 504.90 980.10 500.00 (500.00) 980.10 555 S S S SS S 0.80 5.00% 6.00% 9.800% 10 0 5.00%
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Answer To explain the formulas used and the calculations performed in the provided scenario 1 Pure Business Cash Flows EBIT Earnings Before Interest a... View the full answer
Related Book For
International Marketing And Export Management
ISBN: 9781292016924
8th Edition
Authors: Gerald Albaum , Alexander Josiassen , Edwin Duerr
Posted Date:
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