1. I. Calculate the WACC and the firm value based on the WACC method. It will be necessary to calculate the firm value (and hence the debt ratio) and the WACC for each year.
2. 
   
3. II. Calculate the unlevered cost of equity, ku, and the firm value based on the APV method, assuming ITS has the same risk as the unlevered firm.
4. 
   
5. III. Calculate the firm value based on the APV method, assuming ITS has the same risk as the debt.
6. 
   
7. IV. Calculate the CCF and the firm value based on the CCF method.
8. 
   
9. V. Confirm that the results from the three methods in i), iii), and iv) are identical.
10.  

Transcribed Image Text:

Assumptions (in USD, at the end of each period) Risk Free Rate (Rf) Market Risk Premium (MRP) Tax Rate (tx) Asset Beta (or unlevered equity beta) Debt Beta EBIT Depreciation Capex Increase in NWC Debt Free Cash Flow (FCF) EBIT - Taxes on EBIT + Depreciation -CAPEX - Increase in NWC =FCF A Year0 Yearl B 3.0% 6.0% 40% 1.3 0.35 $150,000 $125,000 C Year2 4.5% 6.0% 35% 1.3 0.3 Year3 5.0% 6.0% 30% 1.3 0.25 Year4 5.5% 6.0% 25% $100,000 $104,000 $108,000 $109,000 $55,000 $57,200 $59,400 $59,950 $65,000 $67,600 $70,200 $70,850 $10,000 $10,400 $80,000 D E 1.3 0.25 Year5 108,000 109,000 -32,400 -27,250 100,000 104,000 -40,000 -36,400 55,000 57,200 59,400 59,950 -65,000 -67,600 -70,200 -70,850 -10,000 -10,400 -10,800 -10,900 40,000 46,800 54,000 59,950 6.0% 6.0% 25% 1.3 0.2 $72,800 $10,800 $10,900 $11,200 $50,000 $25,000 $0 $112,000 $61,600 112,000 -28,000 61,600 -72,800 -11,200 61,600 Assumptions (in USD, at the end of each period) Risk Free Rate (Rf) Market Risk Premium (MRP) Tax Rate (tx) Asset Beta (or unlevered equity beta) Debt Beta EBIT Depreciation Capex Increase in NWC Debt Free Cash Flow (FCF) EBIT - Taxes on EBIT + Depreciation -CAPEX - Increase in NWC =FCF A Year0 Yearl B 3.0% 6.0% 40% 1.3 0.35 $150,000 $125,000 C Year2 4.5% 6.0% 35% 1.3 0.3 Year3 5.0% 6.0% 30% 1.3 0.25 Year4 5.5% 6.0% 25% $100,000 $104,000 $108,000 $109,000 $55,000 $57,200 $59,400 $59,950 $65,000 $67,600 $70,200 $70,850 $10,000 $10,400 $80,000 D E 1.3 0.25 Year5 108,000 109,000 -32,400 -27,250 100,000 104,000 -40,000 -36,400 55,000 57,200 59,400 59,950 -65,000 -67,600 -70,200 -70,850 -10,000 -10,400 -10,800 -10,900 40,000 46,800 54,000 59,950 6.0% 6.0% 25% 1.3 0.2 $72,800 $10,800 $10,900 $11,200 $50,000 $25,000 $0 $112,000 $61,600 112,000 -28,000 61,600 -72,800 -11,200 61,600

Answer rating: 100% (QA)

To calculate the firm value using different methods WACC APV CCF based on the provided data and assumptions well follow these steps year by year Well ... View the full answer