Calculate the current value of the tax shield

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Problem - Dynamic Corporation has an unlevered cost of equity of 12% and is taxed at a 20% 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.

 

(In millions) Projected

Year

1

2

3

4

Free cash flow

$240.0

$200.0

$320.0

$350.0

Interest expense

$100.0

$120.0

$120.0

$140.0

Using the compressed APV model, answer the following questions.

a. Calculate the estimated horizon value of unlevered operations at Year 4 (i.e., immediately alter the Year-4 free cash ?ow).

b. Calculate the current value of unlevered operations.

c. Calculate the estimated horizon value of the tax shield at Year 4 (i.e, immediately after the Year-4 free cash ?ow).

d. Calculate the current value of the tax shield.

e. Calculate the current total value.

Reference no: EM132970084

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