Question

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)? $______ Robert Dubil Homework #9 FINAN 5000-090 2 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? $______

Answer 1

Income Statement
	2015
Sales	12340
Less:Costs	5920
Gross profit	6420
Less: Operating expenses:
Depreciation	1050
EBIT	5370
Interest paid	190
EBT	5180
Tax at 35%	1813
Net Income/EAT	3367

1.Change in net working capital for 2015=(NWC 2015-NWC2014)

ie.(Current assets-Current Liabilities 2015)-(Current assets-Current Liabilities 2014)

ie.(1008-404)-(946-385)=

43

2.Change in gross fixed assets, i.e. capital expenditures, for 2015

Fixed assets 2015-Fixed assets 2014+Depreciation 2015

ie.4600-3907+1050=

1743

3.Free Cash Flow to the Firm for 2015

EBIT*(1-Tax rate)+Depn.-CAPEX-Changes to working capital

ie.(5370*(1-35%))+1050-1743-43=

2754.5

4. Value of the Firm (Assets)

(FCFF*(1+g))/(WACC-g)=(2754.5*(1+2%))/(12%-2%)=

28096

5.Stock price per share using the discounted FCFF valuation

(Value of Firm-Long-term Debt)/No.of equity shares

(28096-2197)/1000=

25.90

6.Free Cash Flow to Equity for 2015

FCFE = Cash from Operating Activities – Capital Expenditures + Net Debt Issued /Retired

ie. (Net Income+Depn.-Changes to W/c)-CAPEX+/- Change in debt

ie.(3367+1050-43)-1743+(2197-2029)=

2799

7.Stock price per share using the discounted FCFE valuation

Value of equity = (FCFE*(1+g))/(ke-g)=(2799*(1+7%))/(20%-7%)=

23038

Stock price/share=23038/1000=

23.04

FCFE = FCFF-(Interest*(1-tax rate))+ Net Debt

2754.5-(190*(1-35%))+(2197-2029)=

2799