Discount Rate Cash flow Growth 5.

00%
Asset Beta 1.5 Initial Investment 1500
(Asset Beta=Equity Beta for unlevered firm)
Risk Free Return (Rf) 5% Additional Debt 750
Market Risk Premium 7.20% Projected Cost of Capital 6.8
Equity Return 15.80% 25%
Rf+ Beta x Premium Total capital 1500

0 1 2
2002E 2003E
Initial Investment -1500
Sales 1200 2400
EBITD 180 360
Depreciation 200 225
EBIT -20 135
Tax @ 40% -8 54
EBIAT -12 81
CAPEX 300 300
Incremental
Investment in WC 0 0

PAT+Dep-Inv-WC Free Cash Flow -112 6

Discount factor(PVIF) 1.00 0.86 0.75
Present Value -1500 -96.718 4.474
Total PV 2728.49
NPV 1228.49

Value of Unlevered Firm 1228.49

 Value of the project for unlevered firm

As unlevered thus beta of asset= beta of equity

Assuming the competitors are also unlevered firms

3 4 5 5
2004E 2005E 2006E Terminal Value

3900 5600 7500

585 840 1125
250 275 300
335 565 825
134 226 330
201 339 495
300 300 300
0 0 0

151 314 495 4812.5 495(1+g)/(r-g) EBIT

0.64 0.56 0.48 0.48 Less :Taxes
97.241 174.621 237.718 2311.149 Add: Depr
Less :CAP
Less: change in NWC
FCF
Discount Rate Cash flow Growth 5.00%
Asset Beta 1.5 Initial Investment 1500
(Asset Beta=Equity Beta for unlevered firm)
Risk Free Return (Rf) 5% Additional Debt 750
Market Risk Premium 7.20% Projected Cost of Debt 6.80%
Equity Return 15.80% 25%
Rf+ Beta x Premium Total capital 1500

0 1 2
2002E 2003E
Initial Investment -1500
Sales 1200 2400
EBITD 180 360
Depreciation 200 225
EBIT -20 135
Tax @ 40% -8 54
EBIAT -12 81
CAPEX 300 300
Incremental
Investment in WC 0 0

PAT+Dep-Inv-WC Free Cash Flow -112 6

Discount factor 1.00 0.86 0.75

Present Value -1500 -96.72 4.47
Total PV 2,728.49
NPV 1,228.49

Interest Tax shield

Debt 750 750 as 750*6.8 for perpetuity
Cost of Debt 6.80% Debt has interest gives me shield as t
Interest Amount 51
Tax rate 40%
Tax shield (perpetuity) 20.40
PV 300 300

Value of the Levered Firm 1,528.49

 APV with fixed 750,000 debt in perpetuity

3 4 5 5
2004E 2005E 2006E Terminal Value

3900 5600 7500

585 840 1125
250 275 300
335 565 825
134 226 330
201 339 495
300 300 300
0 0 0

151 314 495 4812.5

0.64 0.56 0.48 0.48

97.24 174.62 237.72 2311.15

as 750*6.8 for perpetuity and divided bby 6.8 (its disc factor) / 6.8
terest gives me shield as the tax I save as it reduces gap btwn Income and expense
Discount Rate
Asset Beta 1.5
Debt Beta 0.25
Debt 25%
Cost of debt 6.80%
Beta of Equity 1.92 calculate thru formula in the question sheet
Beta of Assest = Beta of debt (D/E+D) + Beta of Equity (E/E+D)
Risk Free Return (Rf) 5%
Market Risk Premium 7.20%
Cost of Equity 18.80% growth 5%
Rf+ Beta x Premium
WACC 15.12%

0 1 2 3
2002E 2003E 2004E
Initial Investment -1500
Sales 1200 2400 3900
EBITD 180 360 585
Depreciation 200 225 250
EBIT -20 135 335
Tax @ 40% -8 54 134
EBIAT -12 81 201
CAPEX 300 300 300
Incremental
Investment in WC 0 0 0

PAT+Dep-Inv-WC Free Cash Flow -112 6 151

Discount factor 1.000 0.869 0.755 0.655

Present Value -1500 -97.29 4.53 98.97
Total PV 2,969.97
NPV 1,469.97
 WACC with 25% Debt / Value ratio in perpetuity

75% 13.76 2070.22

if debt 50% coc=14.44% and total value = 1747.72
adding value to my organization

4 5 5
2005E 2006E Terminal Value

5600 7500
840 1125
275 300
565 825
226 330
339 495
300 300
0 0

314 495 5135.87

0.569 0.495 0.495

178.78 244.82 2540.15
 40%
Discount Rate
Asset Beta 1.5
Debt Beta 0.25
Debt 25%
Cost of debt 6.80%
Beta of Equity 1.92
Beta of Assest = Beta of debt (D/E+D) + Beta of Equity (E/E+D)
Risk Free Return (Rf) 5%
Market Risk Premium 7.20%
Cost of Equity 18.80%
Rf+ Beta x Premium
WACC (with tax consideration) 15.12%

0 1 2 3
2001 2002E 2003E 2004E
Initial Investment -1500
Sales 1200 2400 3900
EBITD 180 360 585
Depreciation 200 225 250
EBIT -20 135 335
Tax @ 40% -8 54 134
EBIAT -12 81 201
CAPEX 300 300 300
Incremental
Investment in WC 0 0 0

PAT+Dep-Inv-WC Free Cash Flow -112 6 151

Discount factor 1.00 0.87 0.75 0.66

PV at end of 2001 -97.29 4.53 98.97
PV at end of 2002 5.21 113.94
PV at end of 2003 131.16748
PV at end of 2004
PV at end of 2005
Pv at end of 2006

GYAAAN
PV at year end 2969.97 3531.03 4058.92
25% debt 742.49 882.76 1014.73
Interest 50.489528 60.027544 69.001709
Tax sheild 20.195811 24.011018 27.600684

Cash Flow -112 6 151

Tax Sheild 20.195811 24.011018 27.600684
Capital cash flow -91.80419 30.011018 178.60068

PVIF 1 0.8636 0.7457 0.6440

PVIF 2969.97222105066 -79.27823 22.380182 115.01578
NPV 1469.97222105066
 End of year debt balances with 25% Debt to value ratio

4 5 5
2005E 2006E Terminal Value

5600 7500
840 1125
275 300
565 825
226 330
339 495
300 300
0 0

314 495 5135.869565217

0.57 0.49 0.49

178.78 244.82 2540.15 2969.972
205.82 281.84 2924.23 3531.032
236.93438 324.45379 3366.37 4058.924
272.75886 373.51121 3875.36 4521.633
429.9861 4461.32 4891.304
5135.869565217 5135.870

GYAAAN
4521.63 4891.30 5135.869565217
1130.41 1222.83 1283.97
76.867767 83.152174 87.3097826087
30.747107 33.26087 34.92391304348

314 495 5135.869565217

30.747107 33.26087
344.74711 528.26087 5135.869565217

0.5561 0.4802 0.4802

191.71955 253.69134 2466.443597806
ances with 25% Debt to value ratio

ans ends here

rate is unlevered 15.8%
Discount Rate
Asset Beta 1.5
Debt Beta 0.25
Debt 25%
Cost of debt 6.80%
Beta of Equity 1.92
Beta of Assest = Beta of debt (D/E+D) + Beta of Equity (E/E+D)
Risk Free Return (Rf) 5%
Market Risk Premium 7.20%
Cost of Equity 18.80%
Rf+ Beta x Premium
WACC (with tax consideration) 15.12%
WACC (without tax consideration) 15.80%

0 1 2 3
2001 2002E 2003E 2004E
Initial Investment -1500
Sales 1200 2400 3900
EBITD 180 360 585
Depreciation 200 225 250
EBIT -20 135 335
Tax @ 40% -8 54 134
EBIAT -12 81 201
CAPEX 300 300 300
Incremental
Investment in WC 0 0 0

PAT+Dep-Inv-WC Free Cash Flow -112 6 151

Discount factor at 15.1 % 1.00 0.87 0.75 0.66

PV at end of 2001 -97.29 4.53 98.97
PV at end of 2002 5.21 113.94
PV at end of 2003 131.16748
PV at end of 2004
PV at end of 2005

PV at year end 2969.97 3531.03 4058.92 4521.63

25% debt 742.49 882.76 1014.73 1130.41
Interest Amount 50.49 60.03 69.00
Tax rate 40% 40% 40%
Tax shield 20.20 24.01 27.60
Capital Cash Flow
(FCF+Tax shield) -91.80 30.01 178.60
PV factors at 15.8% 0.86 0.75 0.64
PV -1500 -79.28 22.38 115.02
Total PV 2969.97
NPV 1469.97
 Capital Cash Flow with 25% debt to value

4 5 5
2005E 2006E Terminal Value

5600 7500
840 1125
275 300
565 825
226 330
339 495
300 300
0 0

314 495 5135.87

0.57 0.49 0.49

178.78 244.82 2540.15 2969.97
205.82 281.84 2924.23 3531.03
236.93438 324.45379 3366.37 4058.92
272.75886 373.51121 3875.36 4521.63
429.9861 4461.32 4891.30

4891.30 5135.8696
1222.83 1283.97
76.87 83.15
40% 40%
30.75 33.26

344.75 528.26 5135.87

0.56 0.48 0.48
191.72 253.69 2466.44
Method Present Value of the firm Assumptions / Usage

For constant value of debt, the interest tax shied risk is

APV 1,528.49 same as risk of debt
Debt equity ratio to remain constant.
WACC 1,469.97 Tax rate remains constant
CCF 1,469.97 Debt equity ratio to remain constant