Question

1. Firm B has an EBIT of $2.4 million. Total capital is $50 million and the capital structure is composed of 40% debt and 60% equity. If the firm’s tax rate is 30%, and the cost of the firm’s debt is 4.5%, what is the Net Income of Firm B?
   • $1050
   • $105

• • $735

• • $780

2. Firm C has an EBIT of $4.8 million, a cost of debt of 3.5% on $40 million in debt and a tax rate of 21%. If the Deprecation is $600,000, the Cost of Goods Sold is $3.1 million, Capital Expenditures are $1.1 million, and the change in NWC is $0, what is the Free Cash Flow of Firm C?

• • $0.192 million

• • $5.308 million

• • $3.292 million

• • $5.492 million

3. At 4.2% annual return, $4000 invested today will be worth which amount in 6 years?

$5120

$5142

$5150

$3125

Answer 1

1.Debt = Total Value of the firm * weight Debt

= $ 50 Million * 40%

= $ 20 Million

Interest =  Debt* Cost of debt

= $ 20 Million * 4.5%

= $ 0.9 Million

EBT = EBIT - Interest

= $ 2.4 Million - 0.9 Million

= $ 1.5 Million

Net Income = EBT * (1-Tax Rate)

= $ 1.5 Million *(1-30%)

= $ 1.05 Million

= 1,050 thousands

Answer = $ 1,050

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2. Free Cash Flow = EBIT * (1- Tax Rate) + Depreciation - Capital Expenditure

= 4.8 Million *(1-21%)+0.6 Million-1.1 Million

= $ 3.292 Million

Answer = $ 3.292 Million

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3. Future Value = Present Value * (1+Rate of Interest)^Time

= $ 4000*(1+4.2%)^6

= $ 5,119.96

= $ 5,120

Answer = $ 5,120