Question

Use the following information to answers questions 17 to 26.  (Long Answer/Essay – primarily Chapter 13 but includes concepts from many chapters) You are the CFO of Micro Spinoff Inc. The company has 3,000,000 shares of common stock outstanding at a market price of $50 a share. Micro Spinoff just paid an annual dividend in the amount of $3.12 per share. The dividend growth rate is 5.8 percent annually. Micro Spinoff also has 70,000 bonds outstanding with a face value of $1,000 per bond that are selling at 115.372 percent of par. The bonds have a 12 percent coupon, pay interest semi-annually, and have 15 years to maturity. Finally, the firm has 400,000 shares of preferred stock outstanding at a market price of $58.48 a share. Preferred stocks pay dividend of 6.67 percent on its par value of $75.00.

23. The firm is considering a three-year expansion project (same operations as the existing projects of the firm) that requires an initial investment in a machine of $200,000. The increase in Net Working Capital (NWC) at time 0 is $10,000 that will be reduced to normal levels at the end of the project at time 3. The machine has a life of 4 years and will be depreciated to 0 using straight-line method. The Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) in the first year is $70,000 and this will grow at 6 percent a year. At the end of the project (year 3), the machine can be sold for $10,000. The firm’s tax rate is 21 percent.

1. what are the annual cash flow from operations in years 1,2,3?

Answer 1

Year	1	2	3
EBITDA	70000	74200	78652
Less: Depreciation	50000	50000	50000
EBIT	20000	24200	28652
Less: Tax	4200	5082	6016.92
EBIT-Tax	15800	19118	22635.08
Add:Depreciation	50000	50000	50000
OCF	65800	69118	72635.08
Working capital			10000
Salvage after tax			18400
Netcash flow	65800	69118	101035.08

Workings

Salvage after tax
Cost of machine	200000
Less: depreciation	150000
Book value	50000
Selling price	10000
Loss on sale	40000
Tax saving	8400
Net salvage	18400