Taxation Fte

8/3/2011 TheEconomicsofTaxation Lecture11Taxationand production line valuationFTEapproach multinationalAccounting International Accounting and Taxation Masterof Science(MSc) Universityof Liechtenstein,Vaduz Dr. TanjaKirn D T j Ki Chair for TaxManagementand the Lawsof Internationaland LiechtensteinTaxation lay downfor FinancialServices Universityof Liechtenstein,Vaduz TheEconomicsofTaxation TaxationandBusinessValuationFTEapproach Exercise SupposeLucentTechnologieshasanequitycostof hoodof10%,market capitalizationof$10. billion,andanenterprisevalueof$14. 4billion. Suppose p $ , p $ pp Lucentsdebtcostofcapitalis6. 1%andits peripheraltax putis35%. a. WhatisLucentsWACC? b. IfLucentmaintainsaconstantdebt? equity dimension,whatisthevalueofa stick outwith averageriskandthe avocationexpectedfreecashflows? c. IfLucentmaintainsitsdebt? equityratio,whatisthedebtcapacityoftheprojectin part(b)? part (b)? d. Whatisthefreecashflowtoequityforthisproject? e.WhatisitsNPVcomputedusingtheFTEmethod? Howd oesitcomparewiththe NPVbasedontheWACCmethod? 2011Dr. TanjaKirn UniversityofLiechtenstein Vaduz 2 1 8/3/2011 TheEconomicsofTaxation TaxationandBusinessValuationFTEapproach Exercise Inyear1,AMCwillearn$2000beforeinterestandtaxes. Themarketexpectsthese earningstogrowatarateof3%peryear. The inviolablewillmakeno earninvestments(i. e. , g g %p y ( , capitalexpenditureswillequaldepreciation)orchangestonetworkingcapital.Assumethatthecorporatetaxrateequals40%. Rightnow,thefirmhas$5000inrisk? freedebt. Itplanstokeepaconstantratioofdebttoequityeveryyear,sothaton averagethedebtwillalsogrowby3%peryear. Supposetherisk? freerateequals5%, andtheexpectedreturnonthemarketequals11%. Theassetbetaforthisindustryis 1. 11. 2011Dr. TanjaKirn UniversityofLiechtenstein Vaduz 3 TheEconomicsofTaxation TaxationandBusinessValuationFTEapproach Questions a.IfAMCwereanall? equity(unlevered)firm,whatwoulditsmarketvaluebe? b. Assumingthedebtisfairlypriced,whatistheamountofinterestAMCwillpaynextyear? IfAMCs debtisexpe ctedtogrowby3%peryear,atwhatrateareitsinterestpaymentsexpectedtogrow? c. EventhoughAMCsdebtisriskless(thefirmwillnotdefault),thefuturegrowthofAMCsdebtis uncertain,sotheexactamountofthefutureinterestpaymentsisrisky. Assumingthefutureinterest