Revenues are forecast to be $100 million each year for the next 10 years, beginning next year.

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Clarence Andrews
5 years ago
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1 Problem 1: DCF (35 points) Bauer Industries is an automobile manufacturer. Management is currently evaluating a proposal to build a plant that will manufacture lightweight trucks. The proposal contains the following forecasts and assumptions: Revenues are forecast to be $100 million each year for the next 10 years, beginning next year. Manufacturing and marketing expenses are estimated to be 45% of revenue each year. Net working capital is estimated to increase by $5 million each year. The plant will require a $150 million initial investment made today. This capital will depreciate in a straight-line manner over the next 10 years. Bauer faces a marginal tax rate of 35%. Bauer plans to use a cost of capital of 12% to evaluate this project. You may ignore the liquidation or continuation value of any capital expenditures (i.e., the plant) and working capital. In other words, you may assume that the plant and all components of working capital just disappear at the end of the project. Bauer has no debt in its capital structure. All dollar figures are in millions unless otherwise specified. a) (10 points) What is annual unlevered net income (a.k.a., net operating profit after taxes) of the project in years one through ten. (Hint: It is the same for all years) (a) (b) (c) 9.00 (d)

2 b) (10 points) What are the free cash flows of the project in years one through ten. (Hint: They are the same for all years) (a) (b) (c) 9.00 (d)

3 c) (5 points) What is the NPV of the project? (a) (b) (c)

4 d) (5 points) To defray the costs of the plant, the construction company has o ered to accept payment of $75 million today and $80 million dollars one year from today. What is the lending rate implied by this financing alternative? (a) 7.00% (b) 12.00% (c) 5.02% (d) 9.54% 5

5 e) (5 points) What is the most that Bauer be willing to pay the construction company in the first year, assuming the payment today remains the same at $75 million? (a) (b) (c)

6 0 : Problem 2: DCF (30 points) You are given the following information for a project that your company is considering undertaking in period Year Sales (Growth Rate) 5% Cost of Goods Sold (% of Sales) 40% Gross Profit Sales, General, and Administrative Expenses (% of Sales) 20% EBITDA Depreciation (% of Sales) 15% Operating Profit (EBIT) Interest Pre-Tax Income Tax (% of Pre-Tax Income) 35% Net Income Capital Expenditures (% of Sales) 15% Net Working Capital (Growth Rate) 5% Change in Net Working Capital Debt ($ mil) Change in Debt Interest 5% You can ignore the first column of percentages and parenthetical expressions, both of which pertain to the assumptions underlying the cash values in the columns labeled 0, 1, 2, and 3. All cash flows are incremental to the project. Use this information to answer the following questions. a) (2 points) What is the net operating profit after taxes (NOPAT) in year 0? (a) (b) (c) b) (2 points) What is the net operating profit after taxes (NOPAT) in year 1? 7

7 (a) (b) (c) c) (2 points) What is the net operating profit after taxes (NOPAT) in year 2? (a) (b) (c) d) (2 points) What is the net operating profit after taxes (NOPAT) in year 3? (a) (b) (c) (d) e) (2 points) What is the unlevered free cash flow (FCF) in year 0? (a) 0.00 (b) (c) (d) f) (2 points) What is the unlevered free cash flow (FCF) in year 1? (a) (b)

8 (c) (d) g) (2 points) What is the unlevered free cash flow (FCF) in year 2? (a) (b) (c) (d) h) (2 points) What is the unlevered free cash flow (FCF) in year 3? (a) (b) (c) (d) i) (2 points) What is the levered free cash flow (FCFE) in year 0? (a) (b) (c) 0.00 (d) j) (2 points) What is the levered free cash flow (FCFE) in year 1? (a) (b) (c) (d)

9 k) (2 points) What is the levered free cash flow (FCFE) in year 2? (a) (b) (c) (d) l) (2 points) What is the levered free cash flow (FCFE) in year 3? (a) (b) (c) (d) m) (3 points) Using the unlevered free cash flows and assuming a discount rate of 12%, what is the net present value (NPV) of the project? (a) (b) (c) n) (3 points) Using the unlevered free cash flows, what is the internal rate of return (IRR) of the project? (a) 5.00% (b) 0.00% (c) 12.00% (d) 38.03% 10

FIN 350 Business Finance Homework 7 Fall 2014 Solutions

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