In: Finance
Lawrence Miller is valuing Yucy Corporation, a corporation that is going out of business in four years. Projected financial statements for the remaining life of Yucy are given below.
Year | 0 | 1 | 2 | 3 | 4 |
Balance Sheet: | |||||
Assets | 250,000 | 180,000 | 130,000 | 100,000 | 0 |
Liabilities | 194,604 | 157,010 | 116,281 | 72,072 | 0 |
Net worth | 55,396 | 22,990 | 13,719 | 27,928 | 0 |
Income Statements: | |||||
Sales | 220,000 | 240,000 | 260,000 | 280,000 | |
Variable cash expenses | 60,000 | 70,000 | 80,000 | 90,000 | |
Fixed cash expenses | 10,000 | 10,000 | 10,000 | 10,000 | |
Depreciation | 70,000 | 50,000 | 30,000 | 100,000 | |
EBIT | 80,000 | 110,000 | 140,000 | 80,000 | |
Interest expense | 9,730 | 7,851 | 5,814 | 3,604 | |
EBT | 70,270 | 102,149 | 134,186 | 76,396 | |
Taxes at 40% | 28,108 | 40,860 | 53,674 | 30,559 | |
Net income before salvage | 42,162 | 61,290 | 80,512 | 45,838 | |
After-tax salvage value | 12,000 | ||||
Net income | 42,162 | 61,290 | 80,512 | 57,838 |
To assist with valuation, Lawrence also gathered the following information:
The economic income during Year 1 is closest to:
$30,261
$41,943
$42,813
$90,883
$96,155
Cost of Debt | 5% | |||||
Cost of Equity | 19% | |||||
WACC | 11% | |||||
Year | 0 | 1 | 2 | 3 | 4 | |
Balance Sheet: | ||||||
Assets | 250,000 | 180,000 | 130,000 | 100,000 | 0 | |
Liabilities | 194,604 | 157,010 | 116,281 | 72,072 | 0 | |
Net worth | 55,396 | 22,990 | 13,719 | 27,928 | 0 | |
Income Statements: | ||||||
Sales | 220,000 | 240,000 | 260,000 | 280,000 | ||
Variable cash expenses | 60,000 | 70,000 | 80,000 | 90,000 | ||
Fixed cash expenses | 10,000 | 10,000 | 10,000 | 10,000 | ||
Depreciation | 70,000 | 50,000 | 30,000 | 100,000 | ||
EBIT | 80,000 | 110,000 | 140,000 | 80,000 | ||
Interest expense | 9,730 | 7,851 | 5,814 | 3,604 | ||
EBT | 70,270 | 102,149 | 134,186 | 76,396 | ||
Taxes at 40% | 28,108 | 40,860 | 53,674 | 30,559 | ||
Net income before salvage | 42,162 | 61,290 | 80,512 | 45,838 | ||
After-tax salvage value | 12,000 | |||||
Net income | 42,162 | 61,290 | 80,512 | 57,838 | ||
Average Equity | 39,193 | 18,355 | 20,824 | |||
Cost of Equity | 7,447 | |||||
Economic Income | 34,715 | =Net Income - Cost of Equity | ||||
Average Capital | 215,000 | 155,000 | 115,000 | |||
Cost of Capital | 23,650 | |||||
EBIT*(1-tax) | 48,000 | |||||
Economic Income | 24,350 | =Total Operating Income - Cost of Capital | ||||
Average Economic Income based on 2 methods | 29,533 | |||||
So, closest is 1st option - $30,261 |