Bain Capital is considering a potential candidate, PubCo, for a highly leveraged buyout. Bain will contribute 25% of the deal value into the new Merger Sub as cash infusion in exchange for equity. A syndicate led by JP Morgan has agreed to provide debt financing for the remaining 75%. After a thorough study of PubCos peer firms, the analyst has determined that the applicable average P/E ratio should be 6, levered beta be 2.4, and debt-equity ratio be 0.3. The equity risk premium is 6.0%. The 10-year Treasury bond rate is 5.0%. The firms marginal tax rate is 40%, and there is no cap on the tax deductibility of net interest expense.

If the buyout can be completed in the current year 2014, then starting 2015 Bain Capital can initiate the operation reform with the aim to reduce PubCos debt-equity ratio from 1.5 to the target level 0.05 within five years. After that, the firms cost of equity is expected to be 10% and equity cash flow is expected to grow annually by 4.5%. The analyst also expects that PubCos net income can reach $25 billion, and the market average P/E ratio remains unchanged in 2019. The detailed projected free cash flow to equity and debt-equity ratio for the five years from 2015 to 2019 are provided below:

Assumptions	2015	2016	2017	2018	2019
Projected E CF)	0.50	0.90	1.70	3.30	6.50
D/E	1.50	0.64	0.27	0.12	0.05

1. What is the comparable unlevered beta? Show your work. Answer is 2.03

2. Calculate the cost of equity from 2015 to 2019. Show your work. Answer is:

Assumptions	2015	2016	2017	2018	2019
Project E CF	0.50	0.90	1.70	3.30	6.50
D/E	1.50	064	10.27	0.12	0.05
Levered	3.86	2.82	2.37	2.18	2.09
ke	0.282	0.219	0.192	0.181	0.176

3. Calculate the total present value of equity cash flow from 2015 to 2019. Show your work. Answer is:

Assumptions	2015	2016	2017	2018	2019
Project E CF	0.50	0.90	1.70	3.30	6.50
D/E	1.50	064	10.27	0.12	0.05
Levered	3.86	2.82	2.37	2.18	2.09
ke	0.282	0.219	0.192	0.181	0.176
Equity CF	0.50	0.90	1.70	3.30	6.50
DCF	0.39	0.58	0.91	1.50	2.51

PV_{FCFE (2015-19)} = $5.89bil

4. What is PubCos equity value in 2014, if we estimate the terminal value by using a discounted cash flow growth model? Show your work. Answer is:

TV₂₀₁₉ = $123.50bil

Discounted TV = $47.77bil

PV = $53.66bil