Question

17-3: 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                 6% rate. Sheldon's unlevered cost of equity is 16%; its tax rate is 40%.

Year	1	2	3
Free Cash Flow ($ millions)	$ 22	$ 35	$ 40
Interest Expense ($ millions)	$ 5	$ 10	$ 16

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

b. What is the current unlevered value of operations?    

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

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

e. What is the current total-l value of the company?

Answer 1

1.
=40*1.06/(16%-6%)=424

2.
=22/1.16+35/1.16^2+40/1.16^3+40*1.06/(16%-6%)*1/1.16^3=342.241379310345

3.
=16*1.06/(16%-6%)=169.6

4.
=5/1.16+10/1.16^2+16/1.16^3+16*1.06/(16%-6%)*1/1.16^3=130.648038049941

5.
=22/1.16+35/1.16^2+40/1.16^3+40*1.06/(16%-6%)*1/1.16^3+5/1.16+10/1.16^2+16/1.16^3+16*1.06/(16%-6%)*1/1.16^3=472.889417360285