a)
To determine: The definition of interest tax shield and value of tax shield.
a)
Explanation of Solution
The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as
Because MM assume zero growth, the value of the tax shield is T(D). If growth is constant, then the value of the tax shield is
b)
To determine: The definition of adjusted present value (APV) model.
b)
Explanation of Solution
The adjusted present-value model discounts expected free cash flows at rTS's unlevered
c)
To determine: The definition of compressed adjusted present value (CAPV) model.
c)
Explanation of Solution
The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.
d)
To determine: The definition of
d)
Explanation of Solution
This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.
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