Horizon value interest tax savings

Reference no: EM13494693

Cherry Diamond (CD) is currently financed with 60% debt at an interest rate of 12%. Additional financial data for CD are as follows: Total debt outstanding is currently $20 million, pre-merger beta (BL) is 2, and post-merger tax rate will be 20%. Assume the risk-free interest rate is 8%, and market risk premium (i.e. market return minus riskfree interest rate) is 5%. Using the CAPM, calculate WP's cost of levered equity; i.e. calculate rEL.

Year 1 2 3 4
FCF $5 $6 $8 $10
Interest expenses $2 $2 $4 $4
Unlevered horizon value (UHV4) $200
Horizon value interest tax savings (HVITS4) $40

Reference no: EM13494693

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