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Use the following information to answer questions 1-7 Consider the following abbreviated financial statements for Boathead...

Use the following information to answer questions 1-7

Consider the following abbreviated financial statements for Boathead Enterprises:

BOATHEAD ENTERPRISES

2014 and 2015 Partial Balance Sheets

Assets                                                       Liabilities and Owners’ Equity

2014      2015                                               2014      2015

Current assets

$ 946

$ 1,008

Current liabilities

$   385

$   404

Net fixed assets

3,907

4,600

Long-term debt

2,029

2,197

Equity

2,439

3,007

BOATHEAD ENTERPRISES

2015 Select Income Statement Info

Sales

$ 12,340

Costs

5,920

Depreciation

1,050

Interest paid

190

The tax rate is 35%. Long term debt trades at par. The firm has 1,000 shares outstanding. Free Cash Flow to the Firm will grow at 2% and the Free Cash Flow to Equity will grow at 7% forever. The weighted average cost of capital is 12%. The cost of equity is 20%. Construct the income statement. Then answer the following 7 questions.

.

1.  What is the change in net working capital for 2015? $______

2.  What is the change in gross fixed assets, i.e. capital expenditures, for 2015? $______

3. What is the Free Cash Flow to the Firm for 2015? $______

4. What is the Value of the Firm (Assets)? $______

5.  What is the stock price per share using the discounted FCFF valuation? $______

6.  What is the Free Cash Flow to Equity for 2015? $______

7. What is the stock price per share using the discounted FCFE valuation? $______

Please show work. Please make answers match the answer key. Here's the answer key:

1. 43

2. 1743

3. 2821

4. 2821

5. 25.61 or 26.01

6. 2799

7. 21.53

Solutions

Expert Solution

INCOME STATEMENT
sales 12340
less:cost of goods sold (5920)
Depreciation (1050)
Earning before interest and tax 5370
less:Interest expense (190)
Earning before tax 5180
less:tax expense (5180*35%) (1813)
Net income 3367

1)Net working capital = current asset -current liabilities

Year Current asset - Current liabilities = Working capital
2014 946 385 561
2015 1008 404 604

change in working capital =Working capital for 2015 -working capital 2014

                                = 604 - 561

                                = $ 43

2)Capital expenditures = Gross fixed asset at end +Depreciation for year -Gross fixed asset at beginning

                 = 4600+ 1050-3907

                  = $ 1743

3)

Operating cash flow = Earning before interest and tax +Depreciation -taxes

                       = 5370 +1050 -1813

                       = 4607

Free cash flow =Operating cash flow - capital expenditures - change in net working capital

                  = 4607 -1743 -43

                   = 2821

4)value of firm asset is equals to Free cash flow = 2821

5)Value of firm = FCF 2015/(rs-g)

                     = 2821 /(.12-.02)

                     = 2821/.10

                      = $ 28210

Value of equity = value of firm -value of debt

                = 28210 - 2197

                 = $ 26013

value per share = 26013 /1000 = $ 26.01 per share

6)Free cash flow to equity = Net income+depreciation -capital expenditure -change in working capital +net borrowing

                  = 3367+1050 -1743-43+168

                  = 2799

**Net borrowing = Debt 2015 -Debt 2014

                = 2197-2029

                  = 168

7)Value of equity =FCF for equity /(cost of equity -g)

                 = 2799 /(.20 -.07)

                = 2799 /.13

              = 2153

value per share= 2153/1000 = $ 21.53 per share

jeff jeffy answered 1 year ago
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