Question:1 Marks

Addition
Cost of Growth Debt
FCFF Due
Capital Rate (million)
to synergy
15% 5% 20 1 mn
0.15 0.05
0.1

Company A B
FCFF 5 4 mn
Value 50 40 mn

Synergy
10 mn
Valuation

Combined
value of the 100 mn
merged firm

Expected
value of equity
80 mn
for combined
entity
2
Question:2 Marks

MV of
Corporate MVof FCFF
Debt-Equity ratio Debt ratio Equity ratio Re Rd equity
tax debt (mn) (mn)
(mn)
0.85 0.45945945945946 0.54054054 12% 7% 40% 220 187 10
0.4

Value of Levered
407 Calculation
Firm

WACC 8.416% WACC 1

re*(E/V)+rd*(D/V)*(1-t)

Growth Rate 5.95921375921376 Value of Firm = FCFF/(WACC-growth)

1

ra 9.7027027027027 ra (Kd*d/v)+(ke*e/v) 1
ra 0.097027027027027

Value of Value of
Unlevered firm 267.115052425431 Unlevered FCFF/ra-g
(Vu) firm (Vu)
2.67115052425431
267.115052425431

PV of Interest tax PV of Interest

139.884947574569 VL-UL
shield tax shield
1
139.884947574569
rD rD_sub Tax Life Debt G.debt rA
12% 8% 15% 20.00 800 500 20% 40 60
20
17
NPV all equity 29.46 0.102 142.78
ITS at 12% debt of 800 107.56
NPV under financing 137.02

PV of after-tax interest saved 142.78 It can be just solved with 10-year annuity formula
Change PV of ITS -22.41
Net change in NPV 120.37

Long form solution

20-years FCF Interest at rD ITS Sub-debt Delta ITS
0 500.00
1 5.00 96 14.4 -34 -3
2 5.20 96 14.4 -34 -3
3 5.41 96 14.4 -34 -3
4 5.62 96 14.4 -34 -3
5 5.85 96 14.4 -34 -3
6 6.08 96 14.4 -34 -3
7 6.33 96 14.4 -34 -3
8 6.58 96 14.4 -34 -3
9 6.84 96 14.4 -34 -3
10 7.12 96 14.4 -34 -3
11 7.40 96 14.4 -34 -3
12 7.70 96 14.4 -34 -3
13 8.01 96 14.4 -34 -3
14 8.33 96 14.4 -34 -3
15 8.66 96 14.4 -34 -3
16 9.00 96 14.4 -34 -3
17 9.36 96 14.4 -34 -3
18 9.74 96 14.4 -34 -3
19 10.13 96 14.4 -34 -3
20 10.53 96 14.4 -534 -3
Marks