BASELINE PERFORMANCE

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

EBIT 20.40 26.80 33.40 36.10 37.90
Tax@34% 6.94 9.11 11.36 12.27 12.89
EBIT(1-t) 13.46 17.69 22.04 23.83 25.01
Depreciation 21.50 13.50 11.50 12.50 12.70
OCF 34.96 31.19 33.54 36.33 37.71
DWC -4.00 -4.00 -4.20 -5.20 -6.10
CAPX -10.70 -10.10 -10.40 -11.50 -13.10
FCF 20.26 17.09 18.94 19.63 18.51
Terminal Value 164.21
CF 20.26 17.09 18.94 19.63 182.73
NPV@13.5% 152.91

VALUE CREATION: MARGIN IMPROVEMENT

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
DEBIT 2.04 2.68 3.34 3.61 3.79
Tax@34% 0.69 0.91 1.14 1.23 1.29
EBIT(1-t) 1.35 1.77 2.20 2.38 2.50
Depreciation 0.00 0.00 0.00 0.00 0.00
OCF 1.35 1.77 2.20 2.38 2.50
DWC 0.00 0.00 0.00 0.00 0.00
CAPX 0.00 0.00 0.00 0.00 0.00
FCF 1.35 1.77 2.20 2.38 2.50
Terminal Value 22.19
CF 1.35 1.77 2.20 2.38 24.69
NPV@13.5% 18.61

VALUE CREATION: WORKING CAPITAL

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
EBIT 0.00 0.00 0.00 0.00 0.00
Tax@34% 0.00 0.00 0.00 0.00 0.00
EBIT(1-t) 0.00 0.00 0.00 0.00 0.00
Depreciation 0.00 0.00 0.00 0.00 0.00
OCF 0.00 0.00 0.00 0.00 0.00
DWC 16.30 2.10
CAPX 0.00 0.00 0.00 0.00 0.00
FCF 16.30 2.10 0.00 0.00 0.00
Terminal Value 0.00
CF 16.30 2.10 0.00 0.00 0.00
NPV@13.5% 15.99

VALUE CREATION: ASSET SALES

 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
EBIT 0.00 0.00 0.00 0.00 0.00
Tax@34% 0.00 0.00 0.00 0.00 0.00
EBIT(1-t) 0.00 0.00 0.00 0.00 0.00
Depreciation 0.00 0.00 0.00 0.00 0.00
OCF 0.00 0.00 0.00 0.00 0.00
DWC 0.00 0.00
CAPX 9.00 6.90 3.40 0.00 0.00
FCF 9.00 6.90 3.40 0.00 0.00
Terminal Value 0.00
CF 9.00 6.90 3.40 0.00 0.00
NPV@13.5% 15.61

VALUE CREATION: LONG-RUN GROWTH

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
EBIT 0.00 0.00 0.00 0.00 0.00
Tax@34% 0.00 0.00 0.00 0.00 0.00
EBIT(1-t) 0.00 0.00 0.00 0.00 0.00
Depreciation 0.00 0.00 0.00 0.00 0.00
OCF 0.00 0.00 0.00 0.00 0.00
DWC 0.00 0.00 0.00 0.00 0.00
CAPX 0.00 0.00 0.00 0.00 0.00
FCF 0.00 0.00 0.00 0.00 0.00
Terminal Value 73.19
CF 0.00 0.00 0.00 0.00 73.19
NPV@13.5% 38.86
Total Base case Value
Base line 152.91
Margin Improvemen 18.61 This APV is so high because ?
WC reduction 15.99
Asset Sales
LT Growth

ITS
15.61
38.86
241.98
100.24
1
342.22

Firm Value at Varying WACC

CAPITAL STRUCTURE
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Revolver@7.5% 13.0 0.2 4.8 11.7 20.9 20.0
Bank Loan@8.0% 80.0 60.0 40.0 20.0 0.0 0.0
Sub Debt@9.5% 150.0 150.0 150.0 150.0 150.0 0.0
LT Debt@9.0% 0.0 0.0 0.0 0.0 0.0 140.0
Total Debt 243.0 210.2 194.8 181.7 170.9 160.0
Total Equity 64.0 64.7 71.8 84.5 99.9 117.2
Total Liabilities 307.0 274.9 266.6 266.2 270.8 277.2
Weghted avg kd 8.90% 9.07% 9.14% 9.21% 9.26% 8.81%
Wd 79.15% 76.46% 73.07% 68.26% 63.11% 57.72%
We 20.85% 23.54% 26.93% 31.74% 36.89% 42.28%
D/E 3.8 3.2 2.7 2.2 1.7 1.4
Ke 30.97% 27.89% 25.32% 22.73% 20.76% 19.90%
WaCC 11.11% 11.14% 11.23% 11.36% 11.51% 11.77%
FCFF 46.91 27.86 24.55 22.01 21.02
TV 325.91338
FCFF+TV 46.91 27.86 24.55 22.01 346.93
Disc factor 0.90 0.81 0.73 0.65 0.58
PV 42.21 22.53 17.83 14.34 202.18
Firm Value 299.09
Value of ITS (Fin Rule 2) 57.11

INTEREST TAX S Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

7.35 6.48 6.06 5.69 5.38
Tax Shield 125.4855
Terminal Value 7.35 6.48 6.06 5.69 125.23
FCF 100.24
NPV@9.5%

WACC Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

EBIT 22.44 29.48 36.74 39.71 41.69
Tax@34% 7.63 10.02 12.49 13.50 14.17
EBIT(1-t) 14.81 19.46 24.25 26.21 27.52
Depreciation 21.50 13.50 11.50 12.50 12.70
OCF 36.31 32.96 35.75 38.71 40.22
DWC 12.30 -1.90 -4.20 -5.20 -6.10
CAPX -1.70 -3.20 -7.00 -11.50 -13.10
FCF 46.91 27.86 24.55 22.01 21.02
Terminal Value 361.44
CF 46.91 27.86 24.55 22.01 382.46
NPV@WACC 323.03

ITS Financing Rule 81.05 Firm value at year 0 WACC

In 3.

This Firm Value is based on current D/E... Note the difference in F

varying WACC
Specifically look at the
any day varying wacc is
 In 3.

This Firm Value is based on current D/E... Note the difference in F

varying WACC
Specifically look at the
any day varying wacc is

Ka 13.50%
L 57.72%
Kd 8.81%
T 34.00%
K* 11.70%

Unlevered Value or base case Value

Value of intermittent ITS @ Kd
Value of Terminal ITS @ K*
 Tax Rate 34% 34.00%

Given

Given
Given

FCF Growth 2% 2.00%

Unleveraged Rate 13.50%

EBIT Increase 10.00%

Tax Rate 34% 34.00%

Given

Given
Given

FCF Growth 2% 2.00%

Unleveraged Rate 13.50%

Tax Rate 34% 34.00%

Given

Inventories
Given

FCF Growth 2% 2.00%

Unleveraged Rate 13.50%

 Tax Rate 34% 34.00%

Given

Given
Asset Sales

FCF Growth 2% 2.00%

Unleveraged Rate 13.50%

Tax Rate 34% 34.00%

Given

Given
Given
18.51
Old Growth 2% 2.00%
New Growth 5% 5.00%
Unleveraged Rate 13.50%

se ?

Year 0 WACC
7.50%
8%
9.50%
 9% Varying WACC.. since the debt goes on reducing.... the its would als
too takes the higher WaCC..

g 5%
4

125.4855
119.85
2
Year 0 WACC if you assume Kd as 9% or 9.5%
Source of funds
EBIT + 10% Debt: $ Amt % of funds
Tax Rate 34% 34.00% Revolving credit @ 7.5% $13 4.20%
Bank debt @ 8.0% 80 26.10%
Given Subordinated debt @ 9.5% 150 48.90%
Equity 64 20.80%
WC+Reduction Total funds 307 100.00%
CAPX+Sale

3
Where from re = 29.5%?
FCF Growth 5% 5.00% At D/E = 0 we have ra = 13.5%.
At D/E = 1 we have re = 18% = 13.5% + (13.5% - 9.0%) where 9
At D/E = 4 we have re = 13.5 + 4(13.5% - 9.5%) = 29.5% where
At D/E of 1.36 19.62

In 3.

Note the difference in Firm Value while you use first year WACC and
varying WACC
Specifically look at the change in terminal value
any day varying wacc is better
In 3.

Note the difference in Firm Value while you use first year WACC and
varying WACC
Specifically look at the change in terminal value
any day varying wacc is better
educing.... the its would also be lesser .. and the tv

or 9.5%

After-tax cost Weighted cost

0.05 0.21%
0.053 1.38%
0.063 3.08%
0.315 6.55%
11.23%

(13.5% - 9.0%) where 9.0 % is borrowing rate at 50% debt.

- 9.5%) = 29.5% where 9.5% is borrowing rate at 80% debt.
137600
10320
147920