Question

Sheldon Corporation projects the following free cash flows (FCFs) and interest expenses for the next 3 years, after which FCF and interest expenses are expected to grow at a constant 8% rate. Sheldon's unlevered cost of equity is 14% its tax rate is 25%.

	Year
	1	2	3
Free cash flow ($ millions)	$20.0	$30.0	$40.0
Interest expense ($ millions)	$12.8	$14.4	$16.0

Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places.

1. What is Sheldon's unlevered horizon value of operations at Year 3?

   $    million

2. What is the current unlevered value of operations?

   $    million

3. What is horizon value of the tax shield at Year 3?

   $    million

4. What is the current value of the tax shield?

   $    million

5. What is the current total value of the company?

   $    million

Answer 1

1.
=40*1.08/(14%-8%)=720.00

2.
=20/1.14+30/1.14^2+40/1.14^3+40/1.14^3*1.08/(14%-8%)=553.606237816764

3.
=16*25%*1.08/(14%-8%)=72.00

4.
=(12.8/1.14+14.4/1.14^2+16/1.14^3+16/1.14^3*1.08/(14%-8%))*25%=56.874935877706

5.
=20/1.14+30/1.14^2+40/1.14^3+40/1.14^3*1.08/(14%-8%)+(12.8/1.14+14.4/1.14^2+16/1.14^3+16/1.14^3*1.08/(14%-8%))*25%=610.48117369447