Usingthefreecashflowsto thefirmthatweestimatedin
Illustration 6.2, we estimate the unlevered firm value (in
millions of euros):
Thecashflowsin thefirst fiveyearsareidentical,but the
terminal value is slightly different because the return on
capital in perpetuity is now set to 6.91% (which is the
unleveredcostofequityratherthanthecostofcapital).The
unlevered firm value for Titan Cement is 2,759 million euros.
2.Computetaxbenefitsofdebt.Thetaxbenefitsfromdebt
arecomputed basedonTitan’sexistingdebtof 414 million
euros and a tax rate of 25.47%:
Thiscapturesthetaxbenefit onthedollardebtoutstanding
todayanddoesnotfactorinfuturedebtissues(orincreasesin
thedebtratio)andthetaxbenefitsthatwillaccruefromthat
additional debt.
3.Estimateexpectedbankruptcy cost.To estimatethis, we
madetwoassumptions.First,basedontheexistingsynthetic
ratingofAA,theprobabilityofdefault(fromTable6.2)atthe
existingdebtlevelisverysmall(0.28percent).Second, we