The following information provides the basis for

performing a straightforward #2932

The following information provides the basis for performing a straightforward application of the
adjusted present value (APV) model.Unlevered cost of equity— The rate of return required by
stockholders in the company, where the firm has used only equity financing. Borrowing rate—the
rate of interest the firm pays on its debt. We also assume that this rate is equal to the current
cost of borrowing for the firm or the current market rate of interest. Tax rate—the corporate tax
rate on earnings. We assume that this tax rate is constant for all income levels. Current debt
outstanding—total interest-bearing debt, excluding payables and other forms of non-interest-
bearing debt, at the time of the valuation. Firm FCFs— Net operating earnings after tax
(NOPAT), plus depreciation (and other noncash charges), less new investments in net working
capital less capital expenditures ( CAPEX) for the period. This is the free cash flow to the
unlevered firm because no interest or principal is considered in its calculation. Interest-bearing
debt— outstanding debt at the beginning of the period, which carries an explicit interest cost.
Interest expense— Interest-bearing debt for the period times the contractual rate of interest that
the firm must pay. Interest tax savings— Interest expense for the period times the corporate tax
rate. a. What is the value of the unlevered firm, assuming that its FCFs for year 5 and be-yond
are equal to the year 4 free cash flow? b. What is the value of the firm’s interest tax savings,
assuming that they remain con-stant for year 4 and beyond? c. What is the value of the levered
firm? d. What is the value of levered firms’s equity, assuming that the firm’s debt is equal to its
book value?View Solution:
The following information provides the basis for performing a straightforward

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