Question

1. FOR THIS AND THE NEXT 2 QUESTIONS. The following data are for a target firm in a merger valuation. The analysis is based on the adjusted present value (APV) approach. Calculate the unlevered horizon value of the firm.

   Current market value of equity	$70
   Value of debt	$20
   Debt ratio	0.60
   Cost of unlevered equity	10%
   WACC	12%
   Growth rate after the horizon: g	4%
   Tax rate: T	40%
   	Current	Year 1	Year 2	Year 3
   Revenues		$115.00	$125.00	$150.00
   Cost of goods sold		80.00	95.00	110.00
   Selling and administration expenses		10.00	12.00	13.00
   Depreciation		10.00	10.00	10.00
   EBIT		$15.00	$8.00	$17.00
   Interest charges		$2.00	$2.50	$3.00
   Total net operating capital	$200.00	$205.00	$208.00	$215.00

   		$55.47
   		$80.67
   		$20.80
   		$67.28
   		None of the above

1 points   

QUESTION 2

1. Refer to above data. Calculate the horizon value of the interest tax savings.

   		$55.47
   		$80.67
   		$20.80
   		$67.28
   		None of the above

1 points   

QUESTION 3

1. Refer to above data. Calculate the value of the target firm's operations.

   		$55.47
   		$80.67
   		$20.80
   		$67.28
   		None of the above

Answer 1

Year 4 onwards Year 1 $ $ Year 2 Year 3 115.00 $ 125.00 $ 80.00 $ 95.00 $ 150.00 110.00 13.00 Particualrs Revenues Cost of goods sold Selling and administration expenses Depreciation EBIT |Тах Depreciation Free Cash Flow (e-f+g) Discount Factor Discounted amount JS | -090 10.00 $ 12.00 $ 10.00 $ 10.00 $ 15.00 $ 8.00 $ 6.00 $ 3.20 $ 10.00 $ 10.00 $ 19.00 $ 14.80 $ 0.909090909 0.8264463 17.27272727 12.231405 10.00 17.00 6.80 10.00 20.20 0.751314801 15.17655898 $ $ 350.13 0.683013455 2 39.1435011

Horizon value colevered firm of = free Cash Flow (I t Growth rate) Cost of - Growth rate onlevered equly 20.2 (1 + 0042 0.10 - 0.04 350.13 : Honzo0 value of interest taa savings (laterest expense x Tox rałe)(I Growth rate) cost of unlevered - Grooth rate equity (3x 40%) (1+0.01) 0.10 0.04 3 20.8 - Rea 1.248 0.06