3 October 2003 QUESTION 3 Step 1-Calculate UCF Cash inflows $2000000 Less cogs (40%) 800000 Less marketing/Admin costs 400000 Operating 800000 Less tax(30%) 240000 $560000 Step 2- Calculate the Value of Debt PV=PⅤ of UCF+(T×D) $560000 0.14+0.30)035×v $4000000 worthdebt 0.895 =$4469274 Debt=$4469274×0.35 $l564246 Step 3-Calculate LCF LCF=UCF-[) XD =$560000 70×0.11×$156424 =$560000-$120447 =$439553 Step 4-Calculate Pv of lCF PV of LCF=S439553 $27472063 October 2003 QUESTION 3 Step 1 – Calculate UCF Cash inflows $2 000 000 Less COGS (40%) 800 000 Less Marketing/Admin costs 400 000 Operating income 800 000 Less Tax (30%) 240 000 UCF $560 000 Step 2 – Calculate the Value of Debt ( ) ( )( ) $4 469 274 0.895 $4 000 000 V 0.30 0.35 V 0.14 $560 000 PV PV of UCF T D with debt with debt Levered firm = = = +  = +  $1564 246 Debt $4 469 274 0.35 = =  Step 3 – Calculate LCF ( )    $439 553 $560 000 - $120 447 $560 000 - 0.70 0.11 $1564 246 LCF UCF - 1- T kd D = = =   =   Step 4 – Calculate PV of LCF $2 747 206 0.16 $439 553 PV of LCF = =