Based on the attached spreadsheet (loosely based on the APV example in class), compute the fol- lowing with a 34% tax rate:

1. (a) Firm value according to APV where the present value of the interest tax shield is computed using Pre-tax WACC, not the cost of debt. (10 points)
2. (b) Firm value according to CCF. (10 points)

The APV and CCF valuations will be identical. Note that depreciation, CAPEX, and change in NWC are all zero.

\fInterest Paid $21.6 $19.1 $17.8 $16.7 $15.8 $22.7 $7.72 $15.0 $29.8 $10.13 $19.7 $37.1 $12.61 $24.5 $40.1 $13.63 $26.5 $42.1 $14.31 $27.8 $27.8 $205.8 $0.5309 $124.0 Free Cash Flows EBIT -Taxes = Unlevered Free Cash Flow Unlevered Cost of Equity Cost of Equity Cost of Debt Terminal Growth Rate Base Valuation Unlevered FCF Terminal Value Discount Factor Present Value Total 34% tax rate No depreciation, CAPEX, or change in NWC 13.50% Pre-tax WACC or Return on Assets 24.00% 9.50% 0.00% for FCF and ITS $15.0 $19.7 $24.5 $26.5 $0.8811 $13.2 $0.7763 $15.3 $0.6839 $16.7 $0.6026 $15.9 $21.6 $7.34 $19.1 $6.49 $17.8 $6.05 $16.7 $5.68 $0.8811 $6.47 $0.7763 $5.04 $0.6839 $4.14 $0.6026 $3.42 $15.8 $5.37 $39.8 $0.5309 $23.98 $22.7 $21.6 $1.10 $0.37 $22.33 $29.8 $19.1 $10.70 $3.64 $26.16 $37.1 $17.8 $19.30 $6.56 $30.54 $40.1 $16.7 $23.40 $7.96 $32.14 $42.1 $15.8 $26.30 $8.94 $33.16 $22.33 $26.16 $30.54 $32.14 $0.8811 $19.67 $228.2 CCF $0.7763 $20.31 $0.6839 $20.89 $0.6026 $19.37 $33.16 $245.6 $0.5309 $148.00 $185.2 Interest Tax Shield Interest Payment Tax Shield Terminal Value Discount Factor Present Value Total $43.1 Unlevered FCF + ITS $228.2 APV 34% CCF Analysis Levered Cash Flows EBIT - Interest Earnings after Interest -Taxes = Levered Cash Flow CCF Valuation Levered FCF Terminal Value Discount Factor Present Value Total 34% Tax Savings $7.34 $7.34 $6.49 $6.49 $6.05 $6.05 $5.68 $5.68 $5.37 $5.37 Levered CF $22.33 Unlevered FCF + ITS $22.33 $26.16 $26.16 $30.54 $30.54 $32.14 $32.14 $33.16 $33.16 Interest Paid $21.6 $19.1 $17.8 $16.7 $15.8 $22.7 $7.72 $15.0 $29.8 $10.13 $19.7 $37.1 $12.61 $24.5 $40.1 $13.63 $26.5 $42.1 $14.31 $27.8 $27.8 $205.8 $0.5309 $124.0 Free Cash Flows EBIT -Taxes = Unlevered Free Cash Flow Unlevered Cost of Equity Cost of Equity Cost of Debt Terminal Growth Rate Base Valuation Unlevered FCF Terminal Value Discount Factor Present Value Total 34% tax rate No depreciation, CAPEX, or change in NWC 13.50% Pre-tax WACC or Return on Assets 24.00% 9.50% 0.00% for FCF and ITS $15.0 $19.7 $24.5 $26.5 $0.8811 $13.2 $0.7763 $15.3 $0.6839 $16.7 $0.6026 $15.9 $21.6 $7.34 $19.1 $6.49 $17.8 $6.05 $16.7 $5.68 $0.8811 $6.47 $0.7763 $5.04 $0.6839 $4.14 $0.6026 $3.42 $15.8 $5.37 $39.8 $0.5309 $23.98 $22.7 $21.6 $1.10 $0.37 $22.33 $29.8 $19.1 $10.70 $3.64 $26.16 $37.1 $17.8 $19.30 $6.56 $30.54 $40.1 $16.7 $23.40 $7.96 $32.14 $42.1 $15.8 $26.30 $8.94 $33.16 $22.33 $26.16 $30.54 $32.14 $0.8811 $19.67 $228.2 CCF $0.7763 $20.31 $0.6839 $20.89 $0.6026 $19.37 $33.16 $245.6 $0.5309 $148.00 $185.2 Interest Tax Shield Interest Payment Tax Shield Terminal Value Discount Factor Present Value Total $43.1 Unlevered FCF + ITS $228.2 APV 34% CCF Analysis Levered Cash Flows EBIT - Interest Earnings after Interest -Taxes = Levered Cash Flow CCF Valuation Levered FCF Terminal Value Discount Factor Present Value Total 34% Tax Savings $7.34 $7.34 $6.49 $6.49 $6.05 $6.05 $5.68 $5.68 $5.37 $5.37 Levered CF $22.33 Unlevered FCF + ITS $22.33 $26.16 $26.16 $30.54 $30.54 $32.14 $32.14 $33.16 $33.16