Problem 3: Business Flows and Financing Effects
	0% Debt/	25% Debt/	50% Debt/
	100% Equity	75% Equity	50% Equity
Pure Business Cash Flows:
EBIT	$1,485	$1,485	$1,485
Taxes (@ 34%)	$505	$505	$505
EBIAT	$980	$980	$980
+Depreciation	$500	$500	$500
-Capital exp.	($500)	($500)	($500)
+Change in net working capital	-	-	-
Free Cash Flow	$980	$980	$980
Unlevered Beta	0.8	0.8	0.8
Risk-Free Rate	5.0%	5.0%	5.0%
Market Premium	6.0%	6.0%	6.0%
Unlevered WACC
Value of Pure Business Flows:
(FCF/Unlevered WACC)
Financing Cash Flows
Interest
Tax Reduction
Pretax Cost of Debt	5.0%	5.0%	5.0%
Value of Financing Effect:
(Tax Reduction/Pretax Cost of Debt)
Total Value (Sum of Values of
Pure Business Flows and Financing Effects)