Net Present Value and Free Cash Flow
Interest Tax Shields
The process of computing Interest tax shields form 2008 to 2012 is shown as below:
Chart 4 * We calculate the annual interest expenses from 2008 to 2012 and then we can get the tax shields for each year. * From Exhibit 6, we know AirThread used a predetermined debt level. It didn’t set a constant interest coverage ratio. So we choose the debt cost of capital(interest rate=5.5%) to discount its interest tax shields because its interest tax shields holds different risk with the whole acquisition project’s cash flow. * At last, we figure out the present value of tax shields form 2008 to 2012 by using the 5.5% interest rate. The present value of interest tax shield is 284.78.
4. Develop an estimate of the long-term growth rate that should be used to estimate AirThread’s terminal value. (2 points)
We use the Gordon Growth Model to estimate the long-term growth rate.
Growth rate = reinvestment rate × rate of return on investment * Chart 5
=Capital expenditures +Investments in working capital-DepreciationNet Operating Profit After Taxes