Q1 Can be rephrased as "What is the value of unlevered firm?

"

Particulars 2002 2003 2004

EBIAT -12 81 201
"+D&A 200 225 250
(Delta Capex) -300 -300 -300
(Delta NWC) 0 0 0
FCFF -112 6 151
PVIF 0.864 0.746 0.644
PVCF -97 4 97
EV 2728
NPV = EV - C0
1228 //1500 coming from case text

Q2 APV = Value of Unlevered Firm + Tax Benefit of borrowing - Bankruptcy cost

Assumption: fixed amount of borrowing = 750000
Tax benefit of borrowing = (Amount of borrowing * Pre-tax CoD * tax Rate) / Pre-tax CoD
= $ 300,000.00
Value of Levered firm under APV approach =
NPV = APV - C0
$ 1,528,000.00
Bankruptcy cost is difficult to predict in real life. Hence most of the time it is considered to be 0. Theor

Q3 Particulars 2002 2003 2004

EBIAT -12 81 201
"+D&A 200 225 250
(Delta Capex) -300 -300 -300
(Delta NWC) 0 0 0
FCFF -112 6 151
PVIF 0.869 0.754 0.655
PVCF -97 5 99
EV 2963
NPV 1463 //1500 coming from case text

Q4 Capital Cash Flow

CCF = FCFF + Interest Tax Shield

Under WACC approach, we consider the benefit of borrowing in the discount rate, whereas under t
approach, we consider the benefit of borrowing in the cash flow. That means the doscount rate und
approach is the unlevered CoE

Particulars 2002 2003 2004

EBIAT -12 81 201
"+D&A 200 225 250
(Delta Capex) -300 -300 -300
(Delta NWC) 0 0 0
FCFF -112 6 151
FCFF + ITS ( == CCF) -91.8540117924 29.1956879024 178.5839421451
PVIF 0.864 0.746 0.644
PVCF -79 22 115
EV 2979
NPV 1479 //1500 from case text

Highest value is obtained using APV approach due to difference in discount rate
Banks go for using CCF approach
 2005 2006
339 495
275 300 Unlevered CoE = rf + Asset Beta*Risk Premium
-300 -300 15.800%
0 0
314 5308 TV = 4813
0.556 0.480
175 2549

coming from case text

orrowing - Bankruptcy cost

Pre-tax CoD * tax Rate) / Pre-tax CoD

$ 3,028,000.00

the time it is considered to be 0. Theoretically, it is around 20% of the firm value

2005 2006
339 495
275 300 Asset Beta = Eq Beta * ( E/V) + Debt Beta * (D/V)
-300 -300 1.5 =
0 0 Eq. Beta =
314 5621 CoE =
0.569 0.494 Pre-tax CoD =
179 2778 Post-tax CoD =
WACC =
coming from case text TV =

g in the discount rate, whereas under the CCF

flow. That means the doscount rate under CCF
ered CoE

2005 2006 Particulars 2002

 339 495 EV 2963
275 300 Debt = 0.45 * EV 740.66
-300 -300 Interest Expense (@6.8%) 50.36
0 0 ITS ( Interest * 0.4) 20.15
314 495
345.712623003 5683 TV =
0.556 0.480
192 2729

from case text

in discount rate
+ Asset Beta*Risk Premium

bt Beta * (D/V)
Eq Beta * 0.75 + 0.25 * 0.25
1.92
18.82400%
6.80%
4.08%
15.14%
5126

1 2 3 4
2003 2004 2005 2006
 3411 4056 4664 5196
852.78 1014.12 1165.91 1298.94
57.99 68.96 79.28 88.33
23.20 27.58 31.71 35.33

5152.777778