Year 0 1

Incremental Earnings Forecast ($ millions) 5%

Sales 77,605,974,835
Cost of Goods Sold 16,468
Gross Profit 77,605,958,367
Operating Expenses 127,000
Depreciation 124,250
EBIT 77,605,707,117
Income Tax at 20% 15,521,141,423
Unlevered Net Income 62,084,565,694
Interest Expense 370,128.00
Levered Net Income 62,084,195,565.76
Free Cash Flow
Plus: Depreciation 124,250
Less: CAPEX 7,711,000
Less: Increases in NWC 14,040 168,480
Free Cash Flow 7,725,040 62,076,810,464

WACC 0.128
Discounted Cash Flow 55,013,125,189
Value 239,418,019,806

616,880 647,724
542,073.814 500,155.979
2,322,371.317
 2 3 4 5
5% 5% 5% 5%
81,486,273,577 85,560,587,256 89,838,616,619 94,330,547,450
17,291 18,156 19,064 20,017
81,486,256,286 85,560,569,100 89,838,597,555 94,330,527,433
133,350 140,018 147,018 154,369
124,250 124,250 124,250 124,250
81,485,998,686 85,560,304,832 89,838,326,286 94,330,248,813
16,297,199,737 17,112,060,966 17,967,665,257 18,866,049,763
65,188,798,948 68,448,243,866 71,870,661,029 75,464,199,051
388,634 408,066 428,469 449,893
65,188,410,314.05 68,447,835,799.75 71,870,232,559.74 75,463,749,157.72

124,250 124,250 124,250 124,250

176,904 185,749 195,037 204,788

65,181,035,294 68,440,471,367 71,862,879,243 75,456,407,512

51,191,175,138 47,634,735,660 44,325,363,277 41,245,895,501

680,110 714,116 749,821

461,479.594 425,794.002 392,867.928
 Year 0 1
Incremental Earnings Forecast ($ millions) 5%
Sales 77,605,974,835
Cost of Goods Sold 16,468
Gross Profit 77,605,958,367
Operating Expenses 127,000
Depreciation 124,250
EBIT 77,605,707,117
Income Tax at 20% 15,521,141,423
Unlevered Net Income 62,084,565,694
Free Cash Flow
Plus: Depreciation 124,250
Less: CAPEX 7,711,000
Less: Increases in NWC 14,040 168,480
Free Cash Flow 7,725,040 62,076,810,464

Pre Tax WACC 0.138

Discounted Cash Flow 54,549,042,587
Value 233,695,876,623 233,703,309,998

Interest Tax Sheild 74,025.60

PV Interest Tax Sheild 66,094.29
Value 291,665

Difference 5,722,143,183
 2 3 4 5
5% 5% 5% 5%
81,486,273,577 85,560,587,256 89,838,616,619 94,330,547,450
17,291 18,156 19,064 20,017
81,486,256,286 85,560,569,100 89,838,597,555 94,330,527,433
133,350 140,018 147,018 154,369
124,250 124,250 124,250 124,250
81,485,998,686 85,560,304,832 89,838,326,286 94,330,248,813
16,297,199,737 17,112,060,966 17,967,665,257 18,866,049,763
65,188,798,948 68,448,243,866 71,870,661,029 75,464,199,051

124,250 124,250 124,250 124,250

176,904 185,749 195,037 204,788

65,181,035,294 68,440,471,367 71,862,879,243 75,456,407,512

50,331,135,695 46,439,357,849 42,848,494,295 39,535,279,573

77,726.88 81,613.22 85,693.89 89,978.58

61,963.39 58,090.68 54,460.01 51,056.26
Answer
If the debt to equity ratio changes the Pre Tax WACC/ the APV Cost of
Capital changes, this affects the APV valuation. Also, since the Pre Tax
WACC changes the After Tax WACC also changes and hence the tax
benefit changes.
 Year 0 1 2
Incremental Earnings Forecast ($ millions) 0 0
Sales ### ###
Cost of Goods Sold 16,468 17,291
Gross Profit ### ###
Operating Expenses 127,000 133,350
Depreciation 122,650 122,650
EBIT ### ###
Interest Expense 21,139 21,139
Income Tax at 20% ### ###
Unlevered Net Income ### ###
Free Cash Flow
Plus: Depreciation 122,650 122,650
Less: CAPEX 440,400
Less: Increases in NWC 14,040 168,480 176,904
Free Cash Flow 454,440 ### ###

Cost of Equity 15%

Discounted Cash Flow ### ###
Value ###
 3 4 5
0 0 0
### ### ###
18,156 19,064 20,017
### ### ###
140,018 147,018 154,369
122,650 122,650 122,650
### ### ###
21,139 21,139 21,139
### ### ###
### ### ###

122,650 122,650 122,650

185,749 195,037 204,788

### ### ###

### ### ###