Scribd Logo
Upload

Welcome to Scribd!

  • 46 views

    You Have Been Recently Hired As A Financial Analyst When

    Uploaded by

    Hassan Jan
    The CFO asks the financial analyst to explain the APV valuation method. The analyst constructs a simple example using Catch-Me Lures, a stable business with $1,000 annual free cash flows. The analyst calculates: (1) the enterprise value of Catch-Me Lures is the perpetuity value of $1,000 annual free cash flows; (2) the tax savings from $5,000 in debt at 4% interest based on a 20% tax rate; and (3) the present value of expected future tax savings from the debt to determine the APV or levered firm value.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    You Have Been Recently Hired As A Financial Analyst When

    Uploaded by

    Hassan Jan
    46 views1 page
    The CFO asks the financial analyst to explain the APV valuation method. The analyst constructs a simple example using Catch-Me Lures, a stable business with $1,000 annual free cash flows. The analyst calculates: (1) the enterprise value of Catch-Me Lures is the perpetuity value of $1,000 annual free cash flows; (2) the tax savings from $5,000 in debt at 4% interest based on a 20% tax rate; and (3) the present value of expected future tax savings from the debt to determine the APV or levered firm value.

    Original Title

    You Have Been Recently Hired as a Financial Analyst When

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The CFO asks the financial analyst to explain the APV valuation method. The analyst constructs a simple example using Catch-Me Lures, a stable business with $1,000 annual free cash flows. The analyst calculates: (1) the enterprise value of Catch-Me Lures is the perpetuity value of $1,000 annual free cash flows; (2) the tax savings from $5,000 in debt at 4% interest based on a 20% tax rate; and (3) the present value of expected future tax savings from the debt to determine the APV or levered firm value.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    46 views1 page

    You Have Been Recently Hired As A Financial Analyst When

    Uploaded by

    Hassan Jan
    The CFO asks the financial analyst to explain the APV valuation method. The analyst constructs a simple example using Catch-Me Lures, a stable business with $1,000 annual free cash flows. The analyst calculates: (1) the enterprise value of Catch-Me Lures is the perpetuity value of $1,000 annual free cash flows; (2) the tax savings from $5,000 in debt at 4% interest based on a 20% tax rate; and (3) the present value of expected future tax savings from the debt to determine the APV or levered firm value.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 1

    You have been recently hired as a financial analyst When

    #2929
    You have been recently hired as a financial analyst. When you arrive at work on Monday
    morning, the CFO of the firm sends you a message asking you to step into her office as soon as
    you have a free minute. Having been on the job just two weeks, you quickly decide you have a
    free minute and go to the executive floor, where the CFO has her office. You discover that the
    CFO wants you to educate her on the meaning and use of the APV valuation method. Although
    she does not elaborate on the reason for her request, you are aware of the office scuttlebutt that
    the board of directors is considering the prospect of taking the firm private and is in discussions
    with an investment banker about the particulars of the deal. After leaving the CFO’s office, you
    decide that the best way to explain the use of the APV methodology is to construct a simple
    example. After thinking about it for an hour or so, you come up with the following illustration:
    Catch-Me Lures, Inc. is a very stable business with expected FCFs of $ 1,000 per year, which is
    likely to be constant for the foreseeable future. The firm currently has no debt outstanding and
    has an equity beta of 1.0. Given a market risk premium of 5% and a risk-free rate of interest of
    8%, you estimate the unlevered cost of equity for the firm to be 8%. a. If Catch-Me Lures’
    expected FCF is a level perpetuity equal to $ 1,000 per year, what is your estimate of the
    enterprise value of the firm?b. To illustrate the effect of debt financing on the value of Catch-Me
    Lures, you assume that the firm borrows $ 5,000 at a rate of 4% and that the firm pays taxes at
    a rate of 20%. Compute the amount of taxes the firm will “save” by virtue of the tax deductibility
    of its interest expense each year. c. It is pretty obvious that borrowing a portion of the firm’s
    capital reduces its tax bill. But how much should you value the interest tax savings due to the
    use of debt financing? After thinking about it a bit, you decide to implement the basic notion of
    valuation and discount the future cash flows using a discount rate that reflects the risk of the
    cash flows. The cash flow estimation was easy. But what discount rate should you use? d. What
    is the present value of the expected future tax savings from borrowing? What then is the value
    of the levered firm ( i. e., the APV valuation)? View Solution:
    You have been recently hired as a financial analyst When

    ANSWER
    http://paperinstant.com/downloads/you-have-been-recently-hired-as-a-financial-analyst-when/

    1/1
    Powered by TCPDF (www.tcpdf.org)

    You might also like