c) Foxtron's management must trade off the tax saving due to additional debt financin he costs of financial distress that rise with the degree of debt financing The valuation process involves four steps Step 1: Calculating the present value of unlevered cash flows for 1989-9 The unlevered cash flows for 1989-93 are shown in the last line of Table 1 TABLE 1. RJR Operating Cash Flows(in Millions 1990 1992 1993 Operating income $2.620S3.410$3645$3,950$4.310 891 1.142 1222 1.326 1448 After-tax operating income 1,7292,268 2.423 2.624 2.862 Add back depreciation 449 Less capital expenditures 512 (203) (275) 3.545 1.805 Unlevered cash flow (UCF) 说明:这里给的是根据原始文献中的数据的计算结果。在原始文献中的“ Change in working capital”一项与作业中给出的值的符号是相反的。这是编辑此道题时出现的错误之一,在此 表示歉意 These flows are discounted by the required asset return, ro, which is 14 percent. The value as of the end of 1988 of the unlevered cash flows expected from 1989 through 1993 54044.3112.1732.3362.536 Step 2: Calculating the present value of m e.=$12.224billion 1.14 +142+145+1.14+ ered cash flows beyond 1993(.e. unlevered terminal value With the indications given in Table 4.3, it's easy to calculate the value, as of the end of 1993, which 2.536(1.03) $23. 746billic 0.14-0.03 This translates to a 1988 value of 23.746 $12.333billion Therefore, the total unlevered value of the firm is ($12. 224+$12. 333=)$24.557 billion To calculate the total buyout value, we must add the interest tax shields expected to be realized by debt financing Step 3: Calculating the present value of interest tax shields for 1989-93 It's easy to calculate interest tax shields for 1989-93 according to Table 4.2 TABLE 2. Tax Shields for 1989-93(in Millions)c) Foxtron's management must trade off the tax saving due to additional debt financing against the costs of financial distress that rise with the degree of debt financing. 4． The valuation process involves four steps: Step 1: Calculating the present value of unlevered cash flows for 1989-93. The unlevered cash flows for 1989-93 are shown in the last line of Table 1. TABLE 1. RJR Operating Cash Flows (in $millions) 1989 1990 1991 1992 1993 Operating income $2,620 $3,410 $3,645 $3,950 $4,310 Tax on operating income 891 1,142 1,222 1,326 1,448 After-tax operating income 1,729 2,268 2,423 2,624 2,862 Add back depreciation 449 475 475 475 475 Less capital expenditures 522 512 525 538 551 Less change in working capital (203) (275) 200 225 250 Add proceeds from asset sales 3,545 1,805 Unlevered cash flow (UCF) $5,404 $4,311 $2,173 $2,336 $2,536 说明：这里给的是根据原始文献中的数据的计算结果。在原始文献中的“Change in working capital”一项与作业中给出的值的符号是相反的。这是编辑此道题时出现的错误之一，在此 表示歉意。 These flows are discounted by the required asset return,r0,which is 14 percent. The value as of the end of 1988 of the unlevered cash flows expected from 1989 through 1993 is $12.224billion 1.14 2.536 1.14 2.336 1.14 2.173 1.14 4.311 1.14 5.404 2 3 4 5 + + + + = Step 2: Calculating the present value of the unlevered cash flows beyond 1993(i.e. unlevered terminal value) . With the indications given in Table 4.3, it’s easy to calculate the value, as of the end of 1993, which is: $23.746billion 0.14 0.03 2.536(1.03) = − This translates to a 1988 value of $12.333billion 1.14 23.746 5 = Therefore, the total unlevered value of the firm is ($12.224+$12.333=) $24.557 billion. To calculate the total buyout value, we must add the interest tax shields expected to be realized by debt financing. Step 3: Calculating the present value of interest tax shields for 1989-93. It’s easy to calculate interest tax shields for 1989-93 according to Table 4.2: TABLE 2. Tax Shields for 1989-93 (in $millions)