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
Expected Growth rate 10% 10% 10% 10% 10%
Reinvestment rate 83.33% 83.33% 83.33% 83.33% 83.33%
EBIT $100.00 $110.00 $121.00 $133.10 $146.41 $161.05
Taxes $44.00 $48.40 $53.24 $58.56 $64.42
EBIT(1-t) $66.00 $72.60 $79.86 $87.85 $96.63
- Reinvestment $55.00 $60.50 $66.55 $73.21 $80.53
FCFF $11.00 $12.10 $13.31 $14.64 $16.11
Terminal Value $932.56
Present Value $9.96 $9.92 $9.88 $9.84 $577.40
Value of Firm = $617.01 $670.42 728.31 791.04 858.98 $932.56
Value of Equity = $493.61 ! Equity as % of value
Value of Debt = $123.40 ! Debt as % of value

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

Interest Exp $8.64 $9.39 $10.20 $11.07 $12.03
EBT $101.36 $111.61 $122.90 $135.34 $149.03
Taxes $40.54 $44.65 $49.16 $54.13 $59.61
Net Income $60.82 $66.97 $73.74 $81.20 $89.42
- Reinvestment $55.00 $60.50 $66.55 $73.21 $80.53
+ New Debt Issued $10.68 $11.58 $12.55 $13.59 $14.71
FCFE $16.50 $18.05 $19.74 $21.58 $23.60
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

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

Pre-tax Cost of Debt 7.00% 7% 7.00% 7.00% 7.00%
After-tax Cost of Debt 4.20% 4% 4.20% 4.20% 4.20%
Cost of Capital 10.44% 10.44% 10.44% 10.44% 10.44%
Terminal Year
5%
50.0%
$169.10
$67.64
$101.46
$50.73
$50.73

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

starting in each year; year 2, year 3…

$169.10
$13.06
$156.05
$62.42
$93.63
$50.73
$9.33 ! This is the new debt issued each year
$52.22

$195.84 ! This is 30% of each year's firm value

12.00%
7.00%
4.20%
10.44% ! Computed using a 70% Equity; 30% Debt
ratio.