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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
$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.
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