W8

AICloud’s expansion generates unlevered free cash flow of $2.16m next year, growing at 3.8% forever. AICloud targets an interest-coverage policy: interest expense each year is 21% of that year’s free cash flow. Tax rate Tc = 40%. The unlevered cost of capital is rU = 10.6%. Using APV and assuming the tax shield has the same risk/growth as the free cash flow, what is the levered value V_L?

In the AICloud interest-coverage policy (interest = 21% of free cash flow each year), which discount rate is MOST appropriate for valuing the interest tax shields in an APV valuation (ignoring distress costs)?

A £1.0m project will generate a perpetual UNLEVERED after-tax cash flow of £300k per year (no growth). Target D/E = 1. Peer unlevered betas are 1.2, 1.3, 1.4. rf = 5% and rD = 5%. Market risk premium = 9%. Tc = 34%. Using WACC with beta-levering, what is the project NPV (approx)?

KBS’s acquisition costs £110m at t=0. It increases free cash flow by £5m next year, growing at 4% forever. Assume the project has the same risk as KBS’s existing assets and KBS’s after-tax WACC is 7.5%. KBS will rebalance after the transaction to maintain a target D/E = 2. Which pair is correct: (i) project NPV and (ii) the debt and equity amounts that finance the £110m while maintaining D/E=2?

A 2-year project has base-case (all-equity) cash flows of $600,000 in year 1 and $700,000 in year 2, with an initial outlay of $1,000,000. The unlevered discount rate is rU = 12%. The firm will borrow $300,000 at t=0, repay $150,000 of principal at t=1, and repay the remaining $150,000 at t=2. The debt interest rate is 8% and the debt is riskless. Corporate tax rate is 30%. Using APV, what is the project's adjusted present value (equivalently, its NPV including financing side effects) (approx)?

APV method. A 4-year project requires £1,000 at t=0 and produces unlevered after-tax free cash flow of £300 at the end of each year (t=1 to 4). It is financed with £600 of riskless debt at rD = 8% (interest-only each year), with the £600 principal repaid in full at t=4. Tax rate Tc = 40%. The unlevered cost of capital is rU = 10%. Ignoring distress costs, what is the project's APV (approx)?