Table A FCF v.
CCF—Comparison Between Free Cash Flow and Capital Cash Flow Methods
Assumptions
Asset Beta = 1 Risk premium = 8%
Risk free rate = 10% Tax rate = 33%
Debt beta = 0 Constant capital structure
Year 0 Year 1 Year 2 Year 3
Part 1: Cost of Capital Calculations
Percent debt 40% 40% 40% 40%
Cost of debt 10% 10% 10% 10%
After-tax cost of debt 6.70% 6.70% 6.70% 6.70%
Debt contribution (Note #1) 2.68% 2.68% 2.68% 2.68%
Percent equity 60% 60% 60% 60%
Equity beta (Note #2) 1.67% 1.67% 1.67% 1.67%
Cost of equity (Note #3) 23.3% 23.3% 23.3% 23.3%
Equity contribution (Note #4) 14.0% 14.0% 14.0% 14.0%
After-tax WACC (Note #5) 16.68% 16.68% 16.68% 16.68%
Pre-tax WACC (Note #6) = KU 18.0% 18.0% 18.0% 18.0%
4.00% 4.00% 4.00% 4.00%
14.0% 14.0% 14.0% 14.0%
Part 2: Valuing Free Cash Flows Using
WACC
Free cash flow -100.0 30.0 30.0 130.0
After-tax WACC 16.68% 16.68% 16.68%
Discount factor 1.000 0.857 0.735 0.630
Present value -100.0 25.7 22.0 81.8
Total NPV 29.6
Part 3: Valuing Capital Cash Flows Using
Cost of Assets
Step 1: Determining debt outstanding
Remaining project value (Note #7) Activo 129.6 121.2 111.4 0.0
Debt (Note #8) Deuda 51.8 48.5 44.6 0.0
D/A 40% 40% 40%
Step 2: Determine interest tax shields
5.18 4.85 4.46
Interest @10% 0.0 5.2 4.8 4.5
Interest tax shield (Note #9) 0.0 1.7 1.6 1.5
Step 3: Add interest tax shield to Free Cash
Flows
Free Cash Flow -100.0 30.0 30.0 130.0
Interest Tax Shield (Note #9) 0.0 1.7 1.6 1.5
Capital Cash Flow (Note #10) -100.0 31.7 31.6 131.5
Step 4: Discount Capital Cash Flows using
the expected asset return
Capital Cash Flow -100.0 31.7 31.6 131.5
Expected asset return (Note #11) 18.00% 18.00% 18.00%
Discount factor 1.000 0.847 0.718 0.609
Present Value -100.0 26.9 22.7 80.0
Total NPV 29.6
Note # 1 Debt contribution is the after-tax cost of debt times the percent debt.
Note #2 Equity beta equals the asset beta divided by the percent equity.
Note #3 Cost of equity is calculated using the CAPM as the risk-free rate plus the equity beta times the risk premium.
Note #4 Equity contribution is the cost of equity times the percent equity.
Note #5 After-tax WACC is the weighted average after-tax cost of debt and equity.
Note #6 Pre-tax WACC is the weighted average pre-tax cost of debt and equity.
Note #7 Remaining project value is the present value of the remaining cash flows.
Note #8 Debt is calculated by multiplying the remaining project value by the assumed leverage.
Note #9 Interest tax shield is the tax rate multiplied by the before-tax interest.
Note #10 Capital cash flow equals the free cash flow plus the interest tax shield.
Note #11 Expected asset return is calculated using the assumed asset beta in the CAPM with the assumed riskless debt rate and risk premium.
Exhibit 1 LBO Inc.
Part A: Cash Flow Forecasts
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Beginning bank debt @ 12% 50,000 27,640 22,527 15,955 6,959 0
Beginning subordinated debt @ 15% 40,000 40,000 40,000 40,000 40,000 35,056
Total de Deudas 90,000 67,640 62,527 55,955 46,959 35,056
EBIT 14,000 16,100 18,515 21,292 24,486 28,159
Interest 12,000 9,317 8,703 7,915 6,835 5,258
Pre-tax income 2,000 6,783 9,812 13,378 17,651 22,901
Tax 640 2,171 3,140 4,281 5,648 7,328
Net income 1,360 4,613 6,672 9,097 12,003 15,572
Noncash adjustments 1,000 500 -100 -100 -100 -100
After-tax proceeds from asset sales 20,000
Tiempo 1 2 3 4 5 6
Available cash flow 22,360 5,113 6,572 8,997 11,903 15,472
Interest 12,000 9,317 8,703 7,915 6,835 5,258
Capital cash flow 34,360 14,429 15,275 16,911 18,738 20,731
Discount factor (Note #1) 0.8475 0.7182 0.6086 0.5158 0.4371 0.3704
Present value 29,119 10,363 9,297 8,723 8,190 7,679
1 1 1 1 1 1
Part B: Valuation
Crecimimiento
0% 5% 10%
Present values:
Cash flows (years 1-6) 73,371 73,371 73,371
Terminal Value (Note #2) 42,663 62,025 105,591
Enterprise value 116,034 135,397 178,962
Less: debt 90,000 90,000 90,000
Equity value (Note #3) 26,034 45,397 128,962
Note #1 Assumes an asset beta of 1.0. The expected asset return is calculated assuming a 10% risk-free rate and an
8% risk premium
Note #2 Terminal Value is calculated as growing perpetuity of Year 6 Capital Cash Flow.
Note #3 This is the value of the post-LBO equity, which is often called the stub value.
Año 2
Total de Deudas
100,000
90,000
80,000
70,000
16,100 60,000
50,000
16,100 40,000
Tasa Impuestos 32.00% (5,152) 30,000
UODI 10,948 20,000
10,000
Partida Virtual 500 0
1 2 3 4 5
Total de Deudas
FCL 11,448
Intereses x Tasa 2,982
Impuestos
CCF 14,429
PV @ KU =18.00%
Crecimiento del
CAPM= KU 5% 5%
RF 10.00%
Beta Activo Bu 1 Valor Terminal
Premio de Riesgo 8.00%
FCL Y 6 20,731
CAPM=KU 18.00% FCL Y 7 21,768
VAL MARCHA
167,443
Y6
PV MARCHA 62,026
eudas
4 5 6
Deudas
