Define each of the following terms: Interest tax shields; value of tax shield, Adjusted present value (APV) model, Compressed adjusted
Topic: Week 8 Questions
Details: Complete the following textbook questions:
Chapter 21: Questions 21-1 and 21-2 on page 868
Chapter 21: Mini-case on page 871 (complete parts A through E)
Business School Assignment Instructions
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Write between 750 – 1,250 words (approximately 3 – 5 pages) using Microsoft Word in APA style.
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Use at least three references from outside the course material; one reference must be from EBSCOhost. Text book, lectures, and other materials in the course may be used, but are not counted toward the three reference requirement.
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Questions
(21-1)
Define each of the following terms:
Interest tax shields; value of tax shield
Adjusted present value (APV) model
Compressed adjusted present value (CAPV) model
(21-2)
Modigliani and Miller assumed that firms do not grow. How does positive growth change their conclusions about the value of the levered firm and its cost of capital?
(21-8). Build a Model: Compressed Adjusted Value Model
Start with the partial model in the file Ch21 P08 Build a Model.xlsx on the textbook’s Web site. Kasperov Corporation has an unlevered cost of equity of 12% and is taxed at a 40% rate. The 4-year forecasts of free cash flow and interest expenses are shown in the following table; free cash flow and interest expenses are expected to grow at a 5% rate after Year 4. Using the compressed APV model, answer the following questions.
INPUTS (In Millions)
Projected
Year:
1
2
3
4
Free cash flow
$200
$280
$320
$340
Interest expense
$100
$120
$120
$140
Calculate the estimated horizon value of unlevered operations at Year 4 (i.e., immediately after the Year-4 free cash flow).
Calculate the current value of unlevered operations.
Calculate the estimated horizon value of the tax shield at Year 4 (i.e., immediately after the Year-4 free cash flow).
Calculate the current value of the tax shield.
Calculate the current total value.
Answer preview for Define each of the following terms: Interest tax shields; value of tax shield, Adjusted present value (APV) model, Compressed adjusted
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