Question

Merger Valuation with Change in Capital Structure
Current target capital structure:
Debt	30.00%
Equity	70.00%
Number of common shares outstanding	1,000,000
Current debt amount	$10,180,000
Debt interest rate	7.50%
Risk-free rate	3.00%
Market risk premium	7.00%
Tax rate	40.00%
Beta	1.30
Interest payments, Years 1 - 3	$1,600,000
Growth rate	6.00%
Free cash flow, Year 1	$2,500,000
Free cash flow, Year 2	$2,900,000
Free cash flow, Year 3	$3,300,000
Free cash flow, Year 4	$3,950,000
Level of debt, Year 3	$26,800,000
New interest rate at higher debt level	8.50%
New target capital structure:
Debt	45.00%
Equity	55.00%
Calculate target firm's levered cost of equity		Formulas
rsL		#N/A
Calculate target firm's unlevered cost of equity
rsU		#N/A
Calculate target firm's unlevered value:
Unlevered horizon value of FCF		#N/A
Unlevered value of operations		#N/A
Calculate value of interest tax shields:
Tax shield, Year 1		#N/A
Tax shield, Year 2		#N/A
Tax shield, Year 3		#N/A
Tax shield, Year 4		#N/A
Tax shield, Horizon value		#N/A
Value of tax shields		#N/A
Calculate target firm's per share value to acquiring firm:
Value of operations		#N/A
Target firm's equity value to acquiring firm		#N/A
Per share value to acquiring firm		#N/A

Answer 1

Please see the table below. The cells highlighted in yellow contain your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.