Question

In: Finance

Lawrence Miller is valuing Yucy Corporation, a corporation that is going out of business in four...

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:

  • Before-tax cost of debt = 5%
  • Weighted average cost of capital = 11%
  • Cost of equity=19%

The economic income during Year 1 is closest to:

  1. $30,261

  2. $41,943

  3. $42,813

  4. $90,883

  5. $96,155

Solutions

Expert Solution

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

Related Solutions

You are valuing the stock of the Northgate Company. The firm is going to pay a...
You are valuing the stock of the Northgate Company. The firm is going to pay a dividend of ​ $5 per share one year from now. Dividends are expected to grow at​ 6% a year for the next 11 years​ (i.e., year 1 through​ 11). Starting from year 12 and​ beyond, the dividend growth rate will drop to​ 1% per year. Northgate Company has a​ 7% WACC, and a ​ 8% cost of equity. Please use an appropriate model to...
Wilkins Food Products, Inc., acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of...
Wilkins Food Products, Inc., acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2019. In payment for the machine Wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 10%. Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2021. The error had caused Wilkins to understate interest...
Wilkins Food Products Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of...
Wilkins Food Products Inc. acquired a packaging machine from Lawrence Specialists Corporation. Lawrence completed construction of the machine on January 1, 2019. In payment for the machine Wilkins issued a three-year installment note to be paid in three equal payments at the end of each year. The payments include interest at the rate of 15%. Lawrence made a conceptual error in preparing the amortization schedule, which Wilkins failed to discover until 2021. As a result of the error, Wilkins understated...
Miller Corporation is a manufacturer with four product lines. Below is some financial information about each...
Miller Corporation is a manufacturer with four product lines. Below is some financial information about each of the four product lines. Product Segment Booyas Widgets Humdrums Loonies Total Sales to nonaffiliates $10,000 $30,000 $35,000 $15,000 $90,000 Intersegment sales 2,000 6,000    8,000 16,000 32,000 Total revenue $12,000 $36,000 $43,000 $31,000 $122,000 Operating profit (loss) 1,000 6,000 (1,000) 8,000 14,000 Identifiable assets 10,000 15,000 60,000 80,000 165,000             Using all the tests below, determine which of the product segments are reportable...
Miller Corporation ? Year 20X1 You have decided to go into the business of selling Motorcycles...
Miller Corporation ? Year 20X1 You have decided to go into the business of selling Motorcycles . You have incorporated your business under the name of Miller Corporation On January 1, 20X1, you begin by depositing $50,000 cash in the new corporate ban k account ? $30,000 of the money is yours and $20,000 is borrowed from your Uncle Mike. For the $30,000, which is yours, you (as Miller Corporation) issue yourself 300 shares of common stock. For the $20,000...
Costco purchased a truck from a company going out of business for $40,000. An appraisal indicated...
Costco purchased a truck from a company going out of business for $40,000. An appraisal indicated the fair value of the truck to be $42,000. Costco estimated the truck would provide future benefits for 3 years and would bring an $8,800 residual value at the end of the 3-year period. How much is the depreciation expense for the second year if the company uses the double- declining-balance method?
Please answer the 3 question below about the Miller Corporation Miller Corporation ‐ Year 20X3  During the...
Please answer the 3 question below about the Miller Corporation Miller Corporation ‐ Year 20X3  During the year, you paid the amounts owed for Motorcycles at the end of year 20X2 and collected all  the amounts owed by customers for 20X2.  You purchased 25 more Motorcycles for $6,000 each and at  the same terms as in 20X2.  During the year, you sold 22 Motorcycles for $11,000 each at the same  terms as 20X2.  You paid the money owed to suppliers (Accounts Payable) at the beginning of the...
In a simple experiment, you are going out there to the duck pond to seine out...
In a simple experiment, you are going out there to the duck pond to seine out one redbreast sunfish at random, determine its sex, and put it back in the pond and then, after 30 minutes, repeat this process. Assuming that the sex ratio for redbreast in the pond is 1:1, develop and plot the pmf of the random variable X, defined as the number of females in the two fish observed. Is the distribution of X symmetric or asymmetric?...
Mary Wells Lawrence once said, “In this business, you can never wash the dinner dishes and...
Mary Wells Lawrence once said, “In this business, you can never wash the dinner dishes and say they are done. You have to keep doing them constantly.” If you were a business executive or information technology manager, discuss how this statement relates to information technology risks, security, and disaster recovery.
Question Ruprecht and Lawrence are partners in Trident Holdings, a business which manufactures synthetic cork products....
Question Ruprecht and Lawrence are partners in Trident Holdings, a business which manufactures synthetic cork products. The business is growing and Ruprecht and Lawrence are keen to obtain further capital, export their products and also reward ten loyal long-term employees who have been with them since they started the business. They decide to change their business structure to a proprietary limited company and request your advice as to the following matters: (a) What is the purpose of the Small Business...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT