Taxation Fte

8/3/2011 Thepolitical economyof imposeationation Lecture11 tax revenueandBusiness paygradeFTE mount InternationalAccounting International Accounting and Taxation Masterof scientific discipline(MSc) Universityof Liechtenstein, crownwork of Liechtenstein Dr. TanjaKirn D T j Ki Chair for TaxManagementand the Lawsof Internationaland LiechtensteinTaxation Institutefor FinancialServices Universityof Liechtenstein,Vaduz TheEconomicsofTaxation TaxationandBusinessValuationFTEapproach do SupposeLucentTechnologieshasan lovelinesscostofcapitalof10%, foodstuff capitalizationof$10. billion,andanenterprisevalueof$14. 4billion. Suppose p $ , p $ pp Lucentsdebtcostofcapitalis6. 1%anditsmarginaltax poseis35%. a. WhatisLucentsWACC? b. IfLucentmaintainsa never-endingdebt? equityratio,whatisthevalueofa honkwith average chanceandthe side by side(p) evaluatefreecashflows? c. IfLucentmaintainsitsdebt? equityratio,whatisthedebtcapacityoftheprojectin part(b)? part (b)? d. Whatisthefreecashflowtoequityforth isproject? e.WhatisitsNPVcomputedusingtheFTE regularity? Howdoesitcomparewiththe NPVbasedontheWACCmethod? 2011Dr. TanjaKirn UniversityofLiechtenstein Vaduz 2 1 8/3/2011 TheEconomicsofTaxation TaxationandBusinessValuationFTEapproach Exercise In grade1,AMCwillearn$2000beforeinterestandtaxes. Themarketexpectsthese earningsto ariseatarateof3%per course. Thefirmwill draw and quarternonetinvestments(i. e. , g g %p y ( , capitalexpenditureswillequaldepreciation)orchangestonetworkingcapital.Assumethattheembodiedtaxrateequals40%. Rightnow,thefirmhas$5000inrisk? freedebt. Itplanstokeepaconstantratioofdebttoequity allyear,sothaton averagethedebtwillalsogrowby3%peryear. Supposetherisk? freerateequals5%, andtheexpectedreturnonthemarketequals11%. Theassetbetaforthis diligenceis 1. 11. 2011Dr. TanjaKirn UniversityofLiechtenstein Vaduz 3 TheEconomicsofTaxation TaxationandBusinessValuationFTEapproach Questions a.IfAMCwereanall? equity(unlevered)firm,whatwoulditsmarketvaluebe? b. assumptivethedebtis fairlypriced,whatistheamountofinterestAMCwillpaynextyear? IfAMCs debtisexpectedtogrowby3%peryear,atwhatrateareitsinterestpaymentsexpectedtogrow? c. EventhoughAMCsdebtisriskless(thefirmwillnotdefault),the futuregrowthofAMCsdebtis uncertain,sotheexactamountofthefutureinterestpaymentsisrisky. Assumingthefutureinterest