Debt beta Levered equity beta Market Risk Premium Risk free rate Borrowing rate (before tax) Number...
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Debt beta Levered equity beta Market Risk Premium Risk free rate Borrowing rate (before tax) Number of common shares Tax rate Given Problem 9-4: Traditional WACC Valuation 0.20 1.60 5% 7% 8% 2,000 30% Solution a. What is Canton's cost of equity capital? What is the after-tax cost of debt for the firm? After-tax cost of debt Levered cost of equity 5.60% 15.00% b. Calculate the equity free cash flows for Canton for each of the next four years. Solution Legend =Value given in problem = Formula/Calculation/Analysi = Qualitative analysis or Short = Goal Seek or Solver cell = Crystal Ball Input Crystal Ball Output Years 1 2 3 4 Sales $ 100,000.00 $ Operating income (Eamings Before Interest and Taxes) 22,000.00 100,000.00 $ 22,000.00 100,000.00 $ 22,000.00 100,000.00 22,000.00 Less: Cash tax payments $ (6,600.00) $ (6,600.00) $ (6,600.00) $ Net operating profits after taxes (NOPAT) (6,600.00) 15,400.00 15,400.00 15,400.00 15,400.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 Plus: Depreciation expense Less: Investments in Net Working Capital in new Capital (CAPEX) Firm free cash flow (FCF) Equity Free Cash Flow Calculation (Firm) Free Cash Flow Less: Interest x (1 - Tax Rate) (Equity) Free Cash Flow (8,000.00) $ 15.40520 $ (8,000.00) 15.400.00 $ (8,000.00) 15.400.00 $ (8,000.00) 15.400.00 1 15,400.00 2 135,400.00 3 4 15,400.00 15,400.00 15,400.00 c. Using the estiamted market values of Canton's debt and equity and the after-tax cost of capital, calculate its WACC. Debt Valuation Present value of interest for Years 1-4 Present value of principal in Year 4 Debt Value Equity Valuation Present value of EFCFs for Years 1-4 Present value of EFCFs for Years 5 and beyond Equity Value Enterprise Value = Debt value + Equity value Market Value Proportion After-Tax Cost Product Long-term Debt Problems 9-4 and 9-6 Income Statements Balance Sheet Readv Annaeathe Debt beta Levered equity beta Market Risk Premium Risk free rate Borrowing rate (before tax) Number of common shares Tax rate Given Problem 9-4: Traditional WACC Valuation 0.20 1.60 5% 7% 8% 2,000 30% Solution a. What is Canton's cost of equity capital? What is the after-tax cost of debt for the firm? After-tax cost of debt Levered cost of equity 5.60% 15.00% b. Calculate the equity free cash flows for Canton for each of the next four years. Solution Legend =Value given in problem = Formula/Calculation/Analysi = Qualitative analysis or Short = Goal Seek or Solver cell = Crystal Ball Input Crystal Ball Output Years 1 2 3 4 Sales $ 100,000.00 $ Operating income (Eamings Before Interest and Taxes) 22,000.00 100,000.00 $ 22,000.00 100,000.00 $ 22,000.00 100,000.00 22,000.00 Less: Cash tax payments $ (6,600.00) $ (6,600.00) $ (6,600.00) $ Net operating profits after taxes (NOPAT) (6,600.00) 15,400.00 15,400.00 15,400.00 15,400.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 Plus: Depreciation expense Less: Investments in Net Working Capital in new Capital (CAPEX) Firm free cash flow (FCF) Equity Free Cash Flow Calculation (Firm) Free Cash Flow Less: Interest x (1 - Tax Rate) (Equity) Free Cash Flow (8,000.00) $ 15.40520 $ (8,000.00) 15.400.00 $ (8,000.00) 15.400.00 $ (8,000.00) 15.400.00 1 15,400.00 2 135,400.00 3 4 15,400.00 15,400.00 15,400.00 c. Using the estiamted market values of Canton's debt and equity and the after-tax cost of capital, calculate its WACC. Debt Valuation Present value of interest for Years 1-4 Present value of principal in Year 4 Debt Value Equity Valuation Present value of EFCFs for Years 1-4 Present value of EFCFs for Years 5 and beyond Equity Value Enterprise Value = Debt value + Equity value Market Value Proportion After-Tax Cost Product Long-term Debt Problems 9-4 and 9-6 Income Statements Balance Sheet Readv Annaeathe
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