CHAT GLOBAL Case Solution
Terminal Value Estimates
Appendix 4 shows the Terminal values, in that table the value of the firm has been calculated by the combination of $7,000 equity and $13,945 of debt. These amount were taken by the market value of the proxy company Comp Co. the total value of the firm is $20,945 which was further broken in to combination of 75% debt and 25% equity. Afterwards, the value of equity become 5,236.25 and for debt, its 15,708.75. the values remain constant in all the years just because the company is following the same capital structure of 0.75:1 in all the years.
Appendix 5 shows all the values pertaining to annual discounting. It can be seen that the Debt/Capital is 75% and Equity/Capital is 25% since, the company is following debt to equity ratio of .75:1. The asset beta of the company which has been calculated by the following formula
|Ïa=[Ve/(Ve+Vd(1-Tc)) * Ïe|
Is showing beta of 0.64 in all the years. While moving towards the all equity WACC, it is assumed as same as cost of equity since, in all equity WACC the company is unlevered (No debt in capital Structure). The all equity WACC is showing an amount of 23% which is equal to the cost of equity and the cost of equity has been calculated by using the formula (Rf+Î²(Rm-Rf)). Furthermore, the equity betais 1.80 and cost of debt is 8% which were given in the data. The cost of debt is assumed equal to the Risk Free Rate which was 8%. Finally, the Weighted Average Cost of Capital is 9% which was calculated by the formula (E/V*Re+D/V*Rd(1-Tc)). Where E/V equals to Equity divided by firm value, D/V equals Debt divided by firm value, Re equals cost of equity, Rd equals cost of debt and Tc equals corporate tax.
There are so many calculations which have been made by the analyst in order to identify the change among the capital structure, cash flows, annual discounting terminal values and annual debt schedule. Afterwards, it has found that the analysis has the same values in major areas throughout the timeline. The reason behind this includes the same capital structure, same inflows and same discounting methods. Things may change if any change occurs to the discussed items……………
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