1989 1990 1991 1992 1993 Interest expenses $3,3843,004$3,111S3,294$3,483 Interest tax shields(Tc=34%) 1.151 1021 581, 1,184 The discounted value of these tax shields is 1.151102110581.1201.184 S3.877billion 1.1351.13521.13531.13541.135 Step 4: Calculating the present value of interest tax shields beyond 1993 Finally, we must calculate the value of tax shields associated with debt used to finance the operations of the company after 1993. Since it's assumed that debt will be maintained at 25 percent of the value of the firm after 1993, it is appropriate to use the WACC method to calculate a terminal value for the firm at the target capital structure. This in turn can be de all-equity value and a value from tax shields F (1-34%)×13.5%+×14%=12.8% Second use it to calculate the levered terminal value as of the end of 1993 2.536(1.03) 526. 654billion Since the levered value of the company is the sum of the unlevered value plus the value of interest tax shields, it is the case the Value of tax shields(end 1993)= Vi(end 1993)-Vu(end 1993) S26.654 billion -$23. 746 billi S2.908 bill Then, we again discount by rowing rat nt to get 2.908 S1.544billion The total value of interest tax shields therefore equals($3.877+$1. 544=$5. 421 billion Adding all of these components together, the total value of RjR under the buyout proposal is 24.557+5.241=$29978 billion. Deducting the $5 billion market value of assumed debt yields a value for equity of $24.978 billion, or $109.07 per share The above process are concluded in Table TABLE 3 RJR LBO Valuation(in Millions except share data) 1989 1990199119921993 Unlevered cash flow(UCF) 5,404$4,311$2,173$2,36$2,536 Terminal value: (3% growth after 1993) Unlevered terminal value (UTV) 23,746 Terminal value at target debt Tax shield in terminal value 2,908 Interest tax shields 1.15110211.0581.1201.184The discounted value of these tax shields is : $3.877billion 1.135 1.184 1.135 1.120 1.135 1.058 1.135 1.021 1.135 1.151 2 3 4 5 + + + + = Step 4: Calculating the present value of interest tax shields beyond 1993. Finally, we must calculate the value of tax shields associated with debt used to finance the operations of the company after 1993. Since it’s assumed that debt will be maintained at 25 percent of the value of the firm after 1993, it is appropriate to use the WACC method to calculate a terminal value for the firm at the target capital structure. This in turn can be decomposed into an all-equity value and a value from tax shields. First, we can calculate its WACC, which is: 14% 12.8% 4 3 (1 34%) 13.5% 4 1  −  +  = . Second, use it to calculate the levered terminal value as of the end of 1993: $26,654billion 0.128 0.03 2.536(1.03) = − Since the levered value of the company is the sum of the unlevered value plus the value of interest tax shields, it is the case that Value of tax shields (end 1993) = VL(end 1993) – VU(end 1993) = $26.654 billion - $23.746 billion = $2.908 billion Then, we again discount by the borrowing rate of 13.5 percent to get $1.544billion 1.135 2.908 5 = The total value of interest tax shields therefore equals ($3.877+$1.544)=$5.421 billion. Adding all of these components together, the total value of RJR under the buyout proposal is 24.557+5.241=$29.978 billion. Deducting the $5 billion market value of assumed debt yields a value for equity of $24.978 billion, or $109.07 per share. The above process are concluded in Table 3: TABLE 3 RJR LBO Valuation (in $millions except share data) 1989 1990 1991 1992 1993 Unlevered cash flow (UCF) $5,404 $4,311 $2,173 $2,336 $2,536 Terminal value:(3% growth after 1993) Unlevered terminal value (UTV) 23,746 Terminal value at target debt 26,654 Tax shield in terminal value 2,908 Interest tax shields 1,151 1,021 1,058 1,120 1,184 1989 1990 1991 1992 1993 Interest expenses $3,384 $3,004 $3,111 $3,294 $3,483 Interest tax shields(TC=34%) 1,151 1,021 1,058 1,120 1,184