Suppose we are planning to buy a company with the following forecasts:
Year 1 2 3 & afterwards
FCF $5 million $ 5.5 million 3% constant growth rate
Debt level $50 million $35 million Constant debt to equity ratio. Capital will be 50% debt and 50% equity, wd = ws = 0.5.
The cost of debt is 5%
The cost of equity is 20%
The tax rate is 40%
The company has 15 million shares outstanding
The current stock price is $2.05
The company is currently holding no financial assets.
The company has $3,000,000 in debt.
WACC, the cost of capital, is equal to 11.5%
RSU, the cost of unlevered equity, is equal to 12.5%
a. Calculate the value of the debt tax shield.
b. Calculate the horizon value of the target.
