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Calculating Firm Value.

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APV Valuation

Unlevered cost of equity: 12%
Borrowing Rate: 8%
Tax Rate: 30%
Current Debt Outstanding: $200.00

Years 1 2 3 4 & Beyond
Firm Free Cash Flows $100.00 $120.00 $180.00 $200.00
Interest-bearing Debt 200.00 150.00 100.00 50.00
Interest Expense 16.00 12.00 8.00 4.00
Interest tax savings 4.80 3.60 2.40 1.20

a) What is the value of the unlevered firm, assuming that its free cash flows for Year 5 and beyond 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 constant for Years 4 and beyond?

c) What is the value of the levered firm?

d) What is the value of the levered firm's equity (assuming that the firm's debt is equal to its book value)?

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Solution Summary

The solution provides the techniques and manner for calculating firm value.

The firm value is calculated by estimating the present value of the free cashflow.