Inputs

Earnings before interest and taxes = 100

Expected growth for next 5 years = 10%
Expected growth after year 5 = 5%
Tax rate = 40%
Debt ratio for the firm = 20%
Cost of equity = 12%
Pre-tax cost of debt = 7%
Return on capital in high growth= 12%
Return on capital in stable growth = 10%
0 1 2 3 4 5 Terminal Year
Expected Growth rate 10% 10% 10% 10% 10% 5%
Reinvestment rate 83.33% 83.33% 83.33% 83.33% 83.33% 50.0%
EBIT $ 100.00 $ 110.00 $ 121.00 $ 133.10 $ $ 146.41 161.05 $ 169.10
Taxes $ 44.00 $ 48.40 $ 53.24 $ $ 58.56 64.42 $ 67.64
EBIT(1-t) $ 66.00 $ 72.60 $ 79.86 $ $ 87.85 96.63 $ 101.46
- Reinvestment $ 55.00 $ 60.50 $ 66.55 $ $ 73.21 80.53 $ 50.73
FCFF $ 11.00 $ 12.10 $ 13.31 $ $ 14.64 16.11 $ 50.73
Terminal Value $ 932.56
Present Value $ 9.96 $ 9.92 $ 9.88 $ 9.84 $ 577.40
Value of Firm = $ 617.01 $ 670.42 728.314002 791.039984 858.983558 $ 932.56 ! This is the present value o
Value of Equity = $ 493.61 ! Equity as % of value starting in each year; year 2
Value of Debt = $ 123.40 ! Debt as % of value

EBIT $ 100.00 $ 110.00 $ 121.00 $ 133.10 $ 146.41 $ 161.05 $ 169.10

Interest Exp $ 8.64 $ 9.39 $ 10.20 $ 11.07 $ 12.03 $ 13.06
EBT $ 101.36 $ 111.61 $ 122.90 $ 135.34 $ 149.03 $ 156.05
Taxes $ 40.54 $ 44.65 $ 49.16 $ 54.13 $ 59.61 $ 62.42
Net Income $ 60.82 $ 66.97 $ 73.74 $ 81.20 $ 89.42 $ 93.63
- Reinvestment $ 55.00 $ 60.50 $ 66.55 $ 73.21 $ 80.53 $ 50.73
+ New Debt Issued $ 10.68 $ 11.58 $ 12.55 $ 13.59 $ 14.71 $ 9.33
FCFE $ 16.50 $ 18.05 $ 19.74 $ 21.58 $ 23.60 $ 52.22
Terminal Value of Equity $ 746.05
Present Value $ 14.73 $ 14.39 $ 14.05 $ 13.72 $ 436.72
Value of Equity = $ 493.61

Capital Structure
Debt at end of year $ 123.40 $ 134.08 $ 145.66 $ 158.21 $ 171.80 $ 186.51 $ 195.84

Cost of Equity 12.00% 12% 12.00% 12.00% 12.00% 12.00%

Pre-tax Cost of Debt 7.00% 7% 7.00% 7.00% 7.00% 7.00%
After-tax Cost of Debt 4.20% 4% 4.20% 4.20% 4.20% 4.20%
Cost of Capital 10.44% 10.44% 10.44% 10.44% 10.44% 10.44%
Terminal Year

! This is the present value of the cash flows to the firm

starting in each year; year 2, year 3

! This is the new debt issued each year

! This is 30% of each year's firm value

! Computed using a 70% Equity; 30% Debt

ratio.