Question

1.

Value the following scenario, assuming there is no end to the timeline and the following data:

Cost of equity = 17.75%

Cost of debt = 6.83%

Debt = $583MM

Equity = $1237MM

Tax rate = 40%

Long-term growth expectations = 3.6%

Future dividends are forecast as follows:

Year 0: n/a

Year 1: 128

Year 2: 149

Year 3: 162

Year 4: 175

Year 5: 182

(Round your answer to the nearest cent)

2.

Use the data below to compute 2014 EBIT:

	2014	2013
Cash	12	20
Short-term investments	5	65
Accounts receivable	366	315
Inventories	553	416
Property, plant & equipment (net)	928	871
Accounts payable	50	35
Short-term debt	95	62
Accrued liabilities	148	132
Long-term debt	663	581
Common stock	130	130
Retained earnings	766	712
Net revenue	3145	2851
Depreciation expense	110	93
Interest	92	65
Taxes	82	84
Net income	253	122

3.

Use the data below to compute 2014 NOPAT:

	2014	2013
Cash	13	18
Short-term investments	7	67
Accounts receivable	370	315
Inventories	552	417
Property, plant & equipment (net)	929	873
Accounts payable	46	34
Short-term debt	97	61
Accrued liabilities	150	131
Long-term debt	662	584
Common stock	130	130
Retained earnings	768	711
Net revenue	3144	2852
Depreciation expense	112	93
Interest	93	62
Taxes	78	83
Net income	251	121

(Round to the nearest whole dollar)

4.

Use the data below to compute 2014 OCF (Operating Cash Flow):

	2014	2013
Cash	15	16
Short-term investments	7	69
Accounts receivable	366	317
Inventories	550	416
Property, plant & equipment (net)	928	875
Accounts payable	50	34
Short-term debt	99	60
Accrued liabilities	145	134
Long-term debt	662	583
Common stock	130	130
Retained earnings	769	711
Net revenue	3145	2851
Depreciation expense	110	92
Interest	88	63
Taxes	83	81
Net income	251	121

(Round to the nearest whole dollar)

5.

Use the data below to compute the change in NOWC (Net Operating Working Capital)

	2014	2013
Cash	11	17
Short-term investments	5	69
Accounts receivable	366	317
Inventories	554	420
Property, plant & equipment (net)	926	873
Accounts payable	49	33
Short-term debt	95	62
Accrued liabilities	149	133
Long-term debt	659	583
Common stock	130	130
Retained earnings	767	710
Net revenue	3148	2855
Depreciation expense	111	95
Interest	93	60
Taxes	83	86
Net income	254	126

(Round to the nearest whole dollar)

6.

Use the data below to compute 2014 FCF (Free Cash Flow):

	2014	2013
Cash	15	15
Short-term investments	10	65
Accounts receivable	366	318
Inventories	551	417
Property, plant & equipment (net)	925	870
Accounts payable	48	32
Short-term debt	100	63
Accrued liabilities	145	130
Long-term debt	663	581
Common stock	130	130
Retained earnings	766	712
Net revenue	3148	2852
Depreciation expense	113	95
Interest	90	62
Taxes	81	86
Net income	254	121

(Round to the nearest whole dollar)

Answer 1

Answer to Question 1:

Value of Firm = Value of Debt + Value of Equity
Value of Firm = $583 + $1,237
Value of Firm = $1,820

Weight of Debt = Value of Debt / Value of Firm
Weight of Debt = $583 / $1,820
Weight of Debt = 0.3203

Weight of Equity = Value of Equity / Value of Firm
Weight of Equity = $1,237 / $1,820
Weight of Equity = 0.6797

WACC = Weight of Debt * Cost of Debt * (1 - Tax Rate) + Weight of Equity * Cost of Equity
WACC = 0.3203 * 6.83% * (1 - 0.40) + 0.6797 * 17.75%
WACC = 13.38%

Growth Rate = 3.60%

Dividend, Year 1 = 128
Dividend, Year 2 = 149
Dividend, Year 3 = 162
Dividend, Year 4 = 175
Dividend, Year 5 = 182

Dividend, Year 6 = Dividend, Year 5 * (1 + Growth Rate)
Dividend, Year 6 = 182 * 1.0360
Dividend, Year 6 = 188.552

Horizon Value, Year 5 = Dividend, Year 6 / (WACC - Growth Rate)
Horizon Value, Year 5 = 188.552 / (0.1338 - 0.0360)
Horizon Value, Year 5 = 1,927.93

Current Value = 128/1.1338 + 149/1.1338^2 + 162/1.1338^3 + 175/1.1338^4 + 182/1.1338^5 + 1,927.93/1.1338^5
Current Value = 1,571.97

Answer of Question 2:

EBIT = Net Income + Taxes + Interest
EBIT = $253 + $82 + $92
EBIT = $427