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9. (NUMERICAL) You are part of a team of analysts working on the valuation of Safeway Stores, Inc. You have just gathered the following information on the company. Note: We are at the end of Year 0. Projections Safeway Stores Inc. (8 Millions) Year 0 Year 1 Year 2 Year 3 Firm FCF 338 239 228 348 EBITDA 747 472 500 650 Cash 150 120 100 100 Other Non-Operating Assets (excluding cash) 70 55 40 45 Total Debt 400 800 770 750 Interest Expenses 32 64 62 60 Additional Assumptions 10-year Treasury rate Cost of debt Total number of shares outstanding at the end of Year 0 (in millions Testate Historical equity beta Historical DV Market Risk Premium Growth Rate of FCF After Year 3 Growth Rate of Interest Expenses After Year 3 3.0% 6.0% 42 40% 0.90 0.20 5.5% 3.0% 0.0% Assume: B, = 0, thus: BE BA (1 + (1 -T.) Be = B_{1+(1-T... The firm intends to change its leverage ratio from D/V of 0.2 to D/V of 0.4, as of the end of year e. As a result, it expects to record higher annual interest expenses, as described in the table. Based on the APV approach, estimate the firm value. (Assume that the only effect of leverage on firm value is through Interest tax shields and that those are discounted at the cost of debt). (you must show how you reach your answer step-by-step) (Use 5-digit rounding to get an exact answer). (a) 7.845 (b) 8,500 (c) 9,225 (d) 8,125 (e) 7,445

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