FIN 350 Business Finance Homework 7 Fall 2014 Solutions
|
|
- Nathaniel Armstrong
- 6 years ago
- Views:
Transcription
1 FIN 350 Business Finance Homework 7 Fall 2014 Solutions 1. Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store, which currently has an abandoned warehouse located on it. Last month, the marketing department spent $10,000 on market research to determine the extent of customer demand for the new store. Now, Home Builder Supply must decide whether to build and open the new store. Which of the following costs should be included in Home Builder Supply s analysis? (a) The cost of the land where the store will be located. No, this is a sunk cost since the company already owns the land. (b) The value of the land if sold. Yes, this is the opportunity cost of not selling the land. (c) The cost of demolishing the abandoned warehouse and clearing the lot. Yes, this is a cost that is incurred if the project is undertaken. (d) The loss of sales in the existing retail outlet if customers switch stores. Yes, this is a side effect (erosion). (e) The $10,000 in market research spent to evaluate customer demand. No, this is a sunk cost that was incurred last month. (f) Construction costs for the new store. Yes, this is a capital expenditure. (g) Interest expense on the debt borrowed to pay the construction costs. No, this is a financing cost. 2. The Jones Company has just completed the third year of a five-year MACRS recovery period for a piece of equipment that it originally purchased for $300,000. (a) What is the book value of the equipment? Using a five-year MACRS recovery period, the depreciation charge and remaining book value is detailed in the table below: Year MACRS schedule: 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% Deprecation expense: $60,000 $96,000 $57,600 $34,560 $34,560 $17,280 Remaining book value: $240,000 $144,000 $86,400 $51,840 $17,280 $0
2 The depreciation expense is calculated by multiplying the cost of the equipment by the MACRS schedule for the current year. The remaining book value is the previous year s book value minus the current year s depreciation. In year 1, the remaining book value is $300, 000 $60, 000 = $240, 000. (b) If Jones sells the equipment today for $180,000 and its tax rate is 35%, what is the after-tax cash flow from selling it? The after-tax cash flow from selling the equipment is: after-tax cash flow = selling price tax rate (selling price book value) = $180, ($180, 000 $86, 400) = $147, Over the past two years, your company designed a smartphone at a cost of $2 million. Now, you are deciding whether to produce the smartphone that you developed. You estimate that you will sell 100,000 units per year for $200 per phone for three years and then shut down production. The variable costs of producing each phone will be $150 per unit. You will use existing equipment for production, which has a book value of $1,000,000 and a market value of $2,500,000. The existing equipment would be depreciated completely in year 1. You will also need to purchase additional equipment for $3,000,000. The new equipment would be depreciated on a 3-year straight line basis to zero. Your company s current level of capital is $200,000. The new product will require the working capital to increase to a level of $300,000 today. Working capital will increase to $350,000 in year 1, then decrease to $300,000 in year 2, and finally to $200,000 in year 3. Your discount rate is 9% and your tax rate is 35%. Compute the incremental free cash flows and compute the NPV of producing the smartphone. The cost for designing the smartphone is a sunk cost and not included in the incremental cash flow below. Revenue for this project is $20,000,000 per year (100,000 units * $200 revenue per phone) and the costs are $15,000,000 per year (100,000 units * $150 costs per phone). The existing equipment has a book value of $1,000,000, which is included in the depreciation for year 1. The cash flow from potentially selling the existing equipment is: selling price (selling price book value)(tax rate) = $2, 500, 000 ($2, 500, 000 $1, 000, 000)(0.35) = $1, 975, 000 This is the after-tax opportunity cost of using the existing equipment. New equipment costs $3,000,000 in year 0. Depreciation for the new equipment is $1,000,000 per year, based on 3-year straight-line depreciation. The cash flow from the change in net working capital is given in the last row: Time Without Project Levels $200,000 $300,000 $350,000 $300,000 $200,000 Change +$100,000 +$50,000 $50,000 $100,000 Cash Flow $100,000 $50,000 +$50,000 +$100,000 2
3 Using the details above, the free cash flow (FCF) can be calculated, as in the table below: Time Revenue 0 $20,000,000 $20,000,000 $20,000,000 Costs 0 $15,000,000 $15,000,000 $15,000,000 Depreciation 0 $2,000,000 $1,000,000 $1,000,000 = Taxable Income 0 $3,000,000 $4,000,000 $4,000,000 Taxes 0 $1,050,000 $1,400,000 $1,400,000 + Depreciation 0 $2,000,000 $1,000,000 $1,000,000 Cap. Ex. $3,000, Opportunity Cost $1,975, Changes in NWC $100,000 $50,000 $50,000 $100,000 Free Cash Flow $5,075,000 $3,900,000 $3,650,000 $3,700,000 Using the free cash flows from above, let s calculate the NPV of the project: NPV = $5, 075, = $4, 432, $3, 900, $3, 650, 000 $3, 700, 000 (1.09) 2 + (1.09) 3 Since the NPV is positive, your company should take the project. 4. Tablet Computers (TC), a private company, has 500,000 outstanding bonds with a $1,000 face value. The coupon rate for its bonds is 5% and coupons are paid annually. The bonds mature in 4 years and have a YTM spread of 340 basis points above the 4-year Treasury note. The yield on the 4-year Treasury note is 2%. The value of TC s equity is $1.24 billion and its tax rate is 34%. Three comparable firms to TC are provided in the table below. What is the equity (levered) beta for TC? First, let s fill in the last three rows of the table below, using the formulas provided. Apple Microsoft Cisco Enterprise value (EV) $2.3B $4B $1.2B Equity value $1.7B $2.5B $0.9B Equity beta Debt = EV equity value $0.6B $1.5B $0.3B D/E = debt / equity β Assets = β Equity / (1 + (1 - t)*d/e)) The average asset beta across the three comparable firms is: β Assets,mean = 3 = Now, let s find the market value of TC s debt. The yield-to-maturity is 2% + 3.4% = 5.4% and the annual coupon payments are $50 (5% $1, 000). Then, the price of a bond is: $ $50 (1.054) 2 + $50 $1, (1.054) 3 (1.054) 4 = $
4 Then, the market value of TC s debt is the number of outstanding bonds multiplied by the price of a bond: 500, 000 $ = $492.9M. Next, the debt-to-equity ratio for TC is: = Lastly, the equity (levered) beta for TC is: D E = $492.9M $1,240M β Equity = β Assets,mean (1 + (1 t) D/E) = (1 + (1 0.34) 0.398) = Paccar Inc. is currently comprised of 75% equity and 25% debt. Its bond rating is A, the yield-to-maturity for its bonds is 5.5%, and its equity (levered) beta is 1.1. Assume that the risk-free rate is 3%, the expected return on the market portfolio is 10%, and the corporate tax rate is 34%. Find the WACC of Paccar if the firm raises its debt to 35% and if the firm lowers its debt to 15%. The yield-to-maturity of its bonds is 5% if it lowers its debt to 15% and the yield-to-maturity of its bonds is 6% if it raises its debt to 35%. How does its current WACC compare to its WACC with more or less debt? First, let s find the asset beta for Paccar: β Assets = β Equity /(1 + (1 t) D/E) = 1.1/(1 + (1 0.34) (0.25/0.75)) = Now, let s find the equity beta for the decrease and increase in debt: β Equity,15% = β Assets (1 + (1 t) D/E) = (1 + (1 0.34) (0.15/0.85)) = β Equity,35% = β Assets (1 + (1 t) D/E) = (1 + (1 0.34) (0.35/0.65)) = Next, let s find the cost of equity for debt at 15%, 25% and 35%: r E,15% = r f + β Equity,15% (E[r M ] r f ) = ( ) = r E,25% = r f + β Equity,25% (E[r M ] r f ) = ( ) = r E,35% = r f + β Equity,35% (E[r M ] r f ) = ( ) =
5 Lastly, let s compute the WACC for debt at 15%, 25% and 35%: r W ACC,15% = r E,15% E% + r D,15% (1 T C )D% = (1 0.34) 0.15 = r W ACC,25% = r E,25% E% + r D,25% (1 T C )D% = (1 0.34) 0.25 = r W ACC,35% = r E,35% E% + r D,35% (1 T C )D% = (1 0.34) 0.35 = The current WACC of 8.9% decreases to 8.896% when debt increases from 25% to 35%. 6. You are recently hired as an analyst for Foster Research. The first project that you are given is to value the stock of Seattle Technologies (ST). ST has both equity and debt in its capital structure. The company has 20 million common shares outstanding and its debt has a market value of $500 million with a yield-to-maturity of 7%. ST s target capital structure has 25% debt and 75% equity. ST s cash flow data for the past 12 months is summarized below: Financials Value, $mil EBITDA 200 EBIT 150 Capital expenditures 14 Changes in net working capital 7 The forecast of free cash flows is detailed below: Years Steady State FCF growth rate N/A 10% 8% 7% 5% 2% growth forever Portland Electronics is the only comparable peer company. This company has an enterprise value of $350 million, its market value of equity is $200 million and a levered beta of 1.7. Assume that the tax rate for all companies is 35%, the risk-free rate is 3% and the market risk premium is 8%. Using the discounted cash flow method, what is the price per share of ST? First, let s calculate Seattle Technologies (ST) free cash flow over the past 12 months: Financials Value, $mil EBITDA 200 EBIT 150 Taxes on EBIT of 35% Depreciation/Amortization +50 Capital expenditures 14 Increase in NWC 7 Free cash flow
6 Next, let s find ST s weighted average cost of capital, which we will use to discount its future cash flows. Unlevering Portland Electronics beta, we find that: β lev β unlev = 1 + (1 t) D/E 1.7 = 1 + (1 0.35) ( )/200 = Levering based on ST s target capital structure, we find that: β lev = (peer β unlev ) (1 + (1 t) D/E) = (1 + (1 0.35) 0.25/0.75) = Using the CAPM, we can find ST s cost of equity: E[r ST ] = r f + β ST (E[r m ] r f ) = = The cost of debt for ST is 7%. Then, using the WACC, we find that: W ACC ST = w E r E + w D r D (1 t) = (1 0.35) = Next, using the free cash flow calculated above and the FCF growth rate, let s find future FCFs: Years FCF growth rate N/A 10% 8% 7% 5% Nominal FCF, $mil The terminal value (TV) in year 4 is: ( ) 1 + g T V 4 = F CF 4 r g ( ) = Then, the enterprise value (EV) of ST is: = $1, mil EV = P V (F CF s) + P V (T V ) = (1.117) (1.117) , (1.117) 4 (1.117) 4 = $1, mil 6
7 Then, the value of ST s equity is: Lastly, the price per share of ST is: Value of equity = EV market value of debt = 1, = $1, mil market value of equity Price per share = shares outstanding 1, mil = 20 mil = $ Bob s Diner has 1 million shares. Its estimated free cash flows per share are: $5.00 $5.50 $6.00 5% growth forever (a) If your discount rate for Bob s Diner s stock is 10%, what is your estimate of its price per share? (You expect to receive the first dividend one year from today.) The estimate of its price per share using discounted cash flow valuation is: P 0 = $5.00 ( ) + $5.50 ( ) 2 + $ = $ ( ) 1 ( ) 2 (b) Bob s Diner has an EBITDA of $8 million in You notice that Bob s Diner s competitor, Pat s Cafe, has an EBITDA of $50 million in 2015 and an enterprise value of $300 million. Assume that Bob s Diner and Pat s Cafe have no debt. Based on the information above, what would you expect Bob s Diner s price per share to be? Using multiple-based valuation, EBITDA is the selected value driver for Bob s Diner. The peer group is Pat s Cafe. The valuation multiple for Pat s Cafe is: EV = $300 } EBIT {{ DA} $50 Pat s Cafe = 6 Then, the enterprise value of Bob s Diner is: EV Bob s Diner = EBIT DA Bob s Diner 6 = $8 6 = $48 This shows that the enterprise value of Bob s Diner is $48 million. Since there are 1 million shares, then Bob s Diner s price is: $48 million / 1 million = $48. 7
8 (c) What might explain the difference between your two estimates of Bob s Diner s price per share? Multiple-based valuation assumes that both companies are exactly alike in their growth prospects, risk, customers, etc. and it only provides an estimate for Bob s Diner s stock price. It appears that the market expects more growth from Bob s Diner than from Pat s Cafe. 8
Practice Final Exam. Before you do anything else, write your name at the top of every page of the exam.
FOSTER SCHOOL OF BUSINESS FINANCE 350 Business Finance PROF. RAN DUCHIN Practice Final Exam Before you do anything else, write your name at the top of every page of the exam. This exam is worth 35% of
More informationChapter 8: Fundamentals of Capital Budgeting
Chapter 8: Fundamentals of Capital Budgeting - 1 Chapter 8: Fundamentals of Capital Budgeting Note: Read the chapter then look at the following. Fundamental question: How do we determine the cash flows
More informationRevenues are forecast to be $100 million each year for the next 10 years, beginning next year.
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
More informationDiscounted Cash Flow Analysis Deliverable #6 Sales Gross Profit / Margin
Discounted Cash Flow Analysis Deliverable #6 The discounted cash flow methodology derives the value of a company by calculating the present value of all future projected cash flows. Unlike comparable companies
More informationFinal Exam: Corporate Finance
Final Exam: Corporate Finance Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. 1. GRL Inc. is a publicly traded company that operates in the software
More informationOFFICE OF CAREER SERVICES INTERVIEWS FINANCIAL MODELING
OFFICE OF CAREER SERVICES INTERVIEWS FINANCIAL MODELING Basic valuation concepts are among the most popular technical tasks you will be asked to discuss in investment banking and other finance interviews.
More informationFinance Recruiting Interview Preparation
Finance Recruiting Interview Preparation Discounted Cash Flows Session #3 This presentation is for informational purposes only, and is not an offer to buy or sell or a solicitation to buy or sell any securities,
More informationChapter 8. Fundamentals of Capital Budgeting
Chapter 8 Fundamentals of Capital Budgeting Chapter Outline 8.1 Forecasting Earnings 8.2 Determining Free Cash Flow and NPV 8.3 Choosing Among Alternatives 8.4 Further Adjustments to Free Cash Flow 8.5
More informationFINM 3401: Corporate Finance Course Notes
FINM 3401: Corporate Finance Course Notes Lecture 1 Introduction and Review of Capital Budgeting What Assets / Projects to Invest in? The primary goal of a firm is to maximise shareholders wealth. A firm
More informationHomework Solutions - Lecture 2 Part 2
Homework Solutions - Lecture 2 Part 2 1. In 1995, Time Warner Inc. had a Beta of 1.61. Part of the reason for this high Beta was the debt left over from the leveraged buyout of Time by Warner in 1989,
More informationCHAPTER 13 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING
CHAPTER 13 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.
More information12. Cost of Capital. Outline
12. Cost of Capital 0 Outline The Cost of Capital: What is it? The Cost of Equity The Costs of Debt and Preferred Stock The Weighted Average Cost of Capital Economic Value Added 1 1 Required Return The
More informationMBA Corporate Finance CUMULATIVE FINAL EXAM - Summer 2009
MBA 8135 - Corporate Finance CUMULATIVE FINAL EXAM - Summer 2009 Georgia State University Department of Finance August 1, 2009 Name (please print) Instructor: PART I: MULTIPLE CHOICE Choose the letter
More informationCorporate Finance: Final Exam
Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. 1. You have been asked to assess the impact of a proposed acquisition
More information2013, Study Session #11, Reading # 37 COST OF CAPITAL 1. INTRODUCTION
COST OF CAPITAL 1 WACC = Weighted Avg. Cost of Capital MCC = Marginal Cost of Capital TCS = Target Capital Structure IOS = Investment Opportunity Schedule YTM = Yield-to-Maturity ERP = Equity Risk Premium
More informationCA - FINAL INTERNATIONAL FINANCIAL MANAGEMENT. FCA, CFA L3 Candidate
CA - FINAL INTERNATIONAL FINANCIAL MANAGEMENT FCA, CFA L3 Candidate 12.1 International Financial Management Study Session 12 LOS 1 : International Capital Budgeting Capital Budgeting is the process
More informationValuation of Warrants
Valuation of Warrants November 9, 2012 Situation Overview ($ in millions) Liberty Media announced that it is spinning off its Starz LLC ( Starz ) business into a new public company through a tax free distribution
More informationFin 3320 Practice Questions 1 Total Course
Fin 3320 Practice Questions 1 Total Course 1. Your wealthy uncle has set up a special account that will give you $500,000 on your 35 th birthday. Assuming you are age 21 (thus 14 years from receiving this),
More informationFinal Exam: Corporate Finance
Final Exam: Corporate Finance Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. 1. Regal Inc. is a publicly traded company that operates in the travel
More informationFinance 402: Problem Set 6 Solutions
Finance 402: Problem Set 6 Solutions Note: Where appropriate, the final answer for each problem is given in bold italics for those not interested in the discussion of the solution. 1. The CAPM E(r i )
More informationShould there be a risk premium for foreign projects?
211 Should there be a risk premium for foreign projects? The exchange rate risk should be diversifiable risk (and hence should not command a premium) if the company has projects is a large number of countries
More informationCHAPTER 6 MAKING CAPITAL INVESTMENT DECISIONS
CHAPTER 6 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will
More informationThe Weighted-Average Cost of Capital and Company Valuation
The Weighted-Average Cost of Capital and Company Valuation Topics Covered Weighted Average Cost of Capital (WACC) Measuring Capital Structure Calculating Required Rates of Return Calculating WACC Interpreting
More informationCHAPTER 19. Valuation and Financial Modeling: A Case Study. Chapter Synopsis
CHAPTER 19 Valuation and Financial Modeling: A Case Study Chapter Synopsis 19.1 Valuation Using Comparables A valuation using comparable publicly traded firm valuation multiples may be used as a preliminary
More informationHomework Solutions - Lecture 2
Homework Solutions - Lecture 2 1. The value of the S&P 500 index is 1312.41 and the treasury rate is 1.83%. In a typical year, stock repurchases increase the average payout ratio on S&P 500 stocks to over
More information1) Side effects such as erosion should be considered in a capital budgeting decision.
Questions Chapter 10 1) Side effects such as erosion should be considered in a capital budgeting decision. [B] :A project s cash flows should include all changes in a firm s future cash flows. This includes
More informationFinancial Modeling Fundamentals Module 08 Discounted Cash Flow (DCF) Analysis Quiz Questions
Financial Modeling Fundamentals Module 08 Discounted Cash Flow (DCF) Analysis Quiz Questions 1. How much would you be willing to pay for a company that generates exactly $100 in Free Cash Flow into eternity?
More informationCHAPTER 6 MAKING CAPITAL INVESTMENT DECISIONS
CHAPTER 6 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concepts Review and Critical Thinking Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will
More informationPMBA 8135 Take Home Problem Set 3 Spring 2014
PMBA 8135 Take Home Problem Set 3 Spring 2014 Directions: Determine or compute an answer for each question/problem on this problem set. After you have computed an answer for every question, enter your
More informationChapter 12. Topics. Cost of Capital. The Cost of Capital
Chapter 12 The Cost of Capital 1 Topics Thinking through Frankenstein Co. s cost of capital Weighted Average Cost of Capital: WACC McDonald s WACC estimation Measuring Capital Structure Required Rates
More informationReal Options. Katharina Lewellen Finance Theory II April 28, 2003
Real Options Katharina Lewellen Finance Theory II April 28, 2003 Real options Managers have many options to adapt and revise decisions in response to unexpected developments. Such flexibility is clearly
More informationAdvanced Corporate Finance. 3. Capital structure
Advanced Corporate Finance 3. Capital structure Objectives of the session So far, NPV concept and possibility to move from accounting data to cash flows => But necessity to go further regarding the discount
More informationMore Tutorial at Corporate Finance
[Type text] More Tutorial at Corporate Finance Question 1. Hardwood Factories, Inc. Hardwood Factories (HF) expects earnings this year of $6/share, and it plans to pay a $4 dividend to shareholders this
More informationExample Exercise: FCF
Example Exercise: FCF You are given the following information about a corporation. The tax on EBITA for 2011 is 20, the amount of necessary cash as a percentage of sales is 2%, and from the income statement
More informationBOND VALUATION. YTM Of An n-year Zero-Coupon Bond
BOND VALUATION BOND VALUATIONS BOND: A security sold by governments and corporations to raise money from investors today in exchange for promised future payments 1. ZERO COUPON BONDS ZERO COUPON BONDS:
More informationInvestment Knowledge Series. Valuation
Investment Knowledge Series Valuation INVESTMENT KNOWLEDGE SERIES Valuation capital city training & consulting www.capitalcitytraining.com i Published 2011 by Capital City Training Ltd ISBN: 978-0-9569238-1-3
More informationShort-Answer. Problems from Chapter 8
Short-Answer 1. Blastoff Shoes is considering building a new retail store in Waco on land that it already owns. Should the cost of the land where the store will be located be included as part of the incremental
More informationExample 3.1. You deposit $110 into a bank that pays 7% interest per year. How much will you have after 1 year? (117.70)
Fin 3014 Principles of Finance Practice Examples Chapter 3: Example 3.1. You deposit $110 into a bank that pays 7% interest per year. How much will you have after 1 year? (117.70) Example. 3.2. You deposit
More informationMIDTERM EXAM SOLUTIONS
MIDTERM EXAM SOLUTIONS Finance 40610 Security Analysis Mendoza College of Business Professor Shane A. Corwin Fall Semester 2007 Monday, October 15, 2007 INSTRUCTIONS: 1. You have 75 minutes to complete
More informationAdvanced Corporate Finance
Introduction Advanced Corporate Finance Introduction Instructor: Nikunj Kapadia Office: Room 310 C Tel: 545 5643 Email: nkapadia@som.umass.edu Class Room: 108 Course Requirement Prerequisite: FINOPMGT
More informationFinal Exam Finance for AEO (Resit)
Final Exam Finance for AEO (Resit) Course: Finance for AEO SubjectCode: 226P05 Date: 8 juli 2008 Length: 2 hours Lecturer: Paul Sengmüller Students are expected to conduct themselves properly during examinations
More informationChapter 18 Valuation and Capital Budgeting for the Levered Firm Dec. 2012
University of Science and Technology Beijing Dongling School of Economics and management Chapter 18 Valuation and Capital Budgeting for the Levered Firm Dec. 2012 Dr. Xiao Ming USTB 1 Key Concepts and
More informationChapter 12. Topics. Cost of Capital. The Cost of Capital
Chapter 12 The Cost of Capital Topics Thinking through Frankenstein Co. s cost of capital Weighted Average Cost of Capital: WACC Measuring Capital Structure Required Rates of Return for individual types
More information4. D Spread to treasuries. Spread to treasuries is a measure of a corporate bond s default risk.
www.liontutors.com FIN 301 Final Exam Practice Exam Solutions 1. C Fixed rate par value bond. A bond is sold at par when the coupon rate is equal to the market rate. 2. C As beta decreases, CAPM will decrease
More information***************************** SAMPLE PAGES FROM TUTORIAL GUIDE *****************************
DCF Modeling Copyright 2008 by Wall Street Prep, Inc. Table of contents SECTION 1: OVERVIEW DCF in theory and in practice Unlevered vs. levered DCF SECTION 2: MODELING THE DCF Modeling unlevered free cash
More informationChapter 13. Risk, Cost of Capital, and Valuation 13-0
Chapter 13 Risk, Cost of Capital, and Valuation 13-0 Key Concepts and Skills Know how to determine a firm s cost of equity capital Understand the impact of beta in determining the firm s cost of equity
More informationDisclaimer: This resource package is for studying purposes only EDUCATION
Disclaimer: This resource package is for studying purposes only EDUCATION Chapter 6: Valuing stocks Bond Cash Flows, Prices, and Yields - Maturity date: Final payment date - Term: Time remaining until
More informationCost of Capital. Chapter 15. Key Concepts and Skills. Cost of Capital
Chapter 5 Key Concepts and Skills Know how to determine a firm s cost of equity capital Know how to determine a firm s cost of debt Know how to determine a firm s overall cost of capital Cost of Capital
More informationFinancial Planning and Control. Semester: 1/2559
Financial Planning and Control Semester: 1/2559 Krisada Khruachalee Master of Science in Applied Statistics, Master of Science in Finance, Bachelor of Business Administration (Cum Laude), Finance and Banking
More informationOPTIMAL CAPITAL STRUCTURE & CAPITAL BUDGETING WITH TAXES
OPTIMAL CAPITAL STRUCTURE & CAPITAL BUDGETING WITH TAXES Topics: Consider Modigliani & Miller s insights into optimal capital structure Without corporate taxes è Financing policy is irrelevant With corporate
More informationCapital Structure Applications
Problem 1 (1) Book Value Debt/Equity Ratio = 2500/2500 = 100% Market Value of Equity = 50 million * $ 80 = $4,000 Market Value of Debt =.80 * 2500 = $2,000 Debt/Equity Ratio in market value terms = 2000/4000
More informationMIDTERM EXAM SOLUTIONS
MIDTERM EXAM SOLUTIONS Finance 70610 Equity Valuation Mendoza College of Business Professor Shane A. Corwin Fall Semester 011 Wednesday, November 16, 011 INSTRUCTIONS: 1. You have 110 minutes to complete
More informationFinance and Accounting for Interviews
This document was developed and written by Ian Lee. All information is meant for public use and purposed for the free transfer of knowledge to interested parties. Send questions and comments to ianlee@uclalumni.net
More informationCA - FINAL 1.1 Capital Budgeting LOS No. 1: Introduction Capital Budgeting is the process of Identifying & Evaluating capital projects i.e. projects where the cash flows to the firm will be received
More informationFinance 402: Problem Set 6
Finance 402: Problem Set 6 1. Halflever, Inc. is financed half by debt and half by equity. You have the following data: Please fill in the blanks. r E =?? r D = 12% r A =?? β E = 1.5 β D =?? β A =?? r
More informationSample Questions for Chapters 10 & 11
Name: Class: Date: Sample Questions for Chapters 10 & 11 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Sacramento Paper is considering
More informationCOST OF CAPITAL CHAPTER LEARNING OUTCOMES
CHAPTER 4 COST OF CAPITAL r r r r LEARNING OUTCOMES Discuss the need and sources of finance to a business entity. Discuss the meaning of cost of capital for raising capital from different sources of finance.
More informationBFC2140: Corporate Finance 1
BFC2140: Corporate Finance 1 Table of Contents Topic 1: Introduction to Financial Mathematics... 2 Topic 2: Financial Mathematics II... 5 Topic 3: Valuation of Bonds & Equities... 9 Topic 4: Project Evaluation
More informationValuation Techniques BANSI S. MEHTA & CO.
Valuation Techniques USHMA SHAH BANSI S. MEHTA & CO. PRICE is what you pay. VALUE is what you get. They are not the I can make a whole lot more money skilfully managing intangible assets than managing
More informationHomework and Suggested Example Problems Investment Valuation Damodaran. Lecture 2 Estimating the Cost of Capital
Homework and Suggested Example Problems Investment Valuation Damodaran Lecture 2 Estimating the Cost of Capital Lecture 2 begins with a discussion of alternative discounted cash flow models, including
More information15.414: COURSE REVIEW. Main Ideas of the Course. Approach: Discounted Cashflows (i.e. PV, NPV): CF 1 CF 2 P V = (1 + r 1 ) (1 + r 2 ) 2
15.414: COURSE REVIEW JIRO E. KONDO Valuation: Main Ideas of the Course. Approach: Discounted Cashflows (i.e. PV, NPV): and CF 1 CF 2 P V = + +... (1 + r 1 ) (1 + r 2 ) 2 CF 1 CF 2 NP V = CF 0 + + +...
More informationFINC 3630: Advanced Business Finance Additional Practice Problems
FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended January 28, 2018 (the 2017 fiscal
More informationCHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS
CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concept Questions 1. In this context, an opportunity cost refers to the value of an asset or other input that will be used in a project. The relevant
More informationLecture Wise Questions of ACC501 By Virtualians.pk
Lecture Wise Questions of ACC501 By Virtualians.pk Lecture No.23 Zero Growth Stocks? Zero Growth Stocks are referred to those stocks in which companies are provided fixed or constant amount of dividend
More informationChapter 14 The Cost of Capital
Topics Covered Chapter 14 The Cost of Capital Konan Chan Financial Management, Fall 2018 Cost of capital Weighted average cost of capital (WACC) Capital structure Required rates of return Divisional costs
More informationFINC 3630: Advanced Business Finance Additional Practice Problems
FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal year-ended January 27, 2017 (the 2016 fiscal
More information4. What is Free Cash Flow? 5.
Chapter 4 Class Notes Cash Flows and Planning 1. Why do we have things like depreciation? Smooths income Imagine 3 years of steady income and then a big purchase. What happens if we write off the entire
More informationWeek 6 Equity Valuation 1
Week 6 Equity Valuation 1 Overview of Valuation The basic assumption of all these valuation models is that the future value of all returns can be discounted back to today s present value. Where t = time
More informationCHAPTER 11. Topics. Cash Flow Estimation and Risk Analysis. Estimating cash flows: Relevant cash flows Working capital treatment
CHAPTER 11 Cash Flow Estimation and Risk Analysis 1 Topics Estimating cash flows: Relevant cash flows Working capital treatment Risk analysis: Sensitivity analysis Scenario analysis Simulation analysis
More informationIncremental Cash Flow: Example
Note 8. Making Capital Investment Decisions To include or not to include? that is the question. General Milk Company is currently evaluating the NPV of establishing a line of chocolate milk. As part of
More informationTwelve Myths in Valuation
Twelve Myths in Valuation Aswath Damodaran http://www.damodaran.com Aswath Damodaran 1 Why do valuation? " One hundred thousand lemmings cannot be wrong" Graffiti Aswath Damodaran 2 1. Valuation is a science
More informationMath 5621 Financial Math II Spring 2016 Final Exam Soluitons April 29 to May 2, 2016
Math 56 Financial Math II Spring 06 Final Exam Soluitons April 9 to May, 06 This is an open book take-home exam. You may consult any books, notes, websites or other printed material that you wish. Having
More informationCost of Capital (represents risk)
Cost of Capital (represents risk) Cost of Equity Capital - From the shareholders perspective, the expected return is the cost of equity capital E(R i ) is the return needed to make the investment = the
More informationchapter12 Home Depot Inc. grew phenomenally Cash Flow Estimation and Risk Analysis
chapter12 Cash Flow Estimation and Risk Analysis Home Depot Inc. grew phenomenally during the 1990s, and it is still growing rapidly. At the beginning of 1990, it had 118 stores and annual sales of $2.8
More informationChapter 15. Required Returns and the Cost of Capital. Required Returns and the Cost of Capital. Key Sources of Value Creation
15-1 Chapter 15 Required Returns and the Cost of Capital Fundamentals of Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D. 15-2 After studying Chapter 15, you should be able to: Explain
More informationHomework Solution Ch15
FIN 302 Homework Solution Ch15 Chapter 15: Debt Policy 1. a. True. b. False. As financial leverage increases, the expected rate of return on equity rises by just enough to compensate for its higher risk.
More informationCAPITAL STRUCTURE AND VALUE
UV3929 Rev. Jun. 30, 2011 CAPITAL STRUCTURE AND VALUE The underlying principle of valuation is that the discount rate must match the risk of the cash flows being valued. Furthermore, when we include the
More informationCorporate Finance Primer
Chartered Professional Accountants of Canada, CPA Canada, CPA are trademarks and/or certification marks of the Chartered Professional Accountants of Canada. 2018, Chartered Professional Accountants of
More informationFIN622 Formulas
The quick ratio is defined as follows: Quick Ratio = (Current Assets Inventory)/ Current Liabilities Receivables Turnover = Annual Credit Sales / Accounts Receivable The collection period also can be written
More informationMATELAN Research. InVision 49.0 Buy. Excellent margin trend in Prelims. Update Note. 24 February Company / Sector Fair Value Recommendation
Update Note Price as of 21/02/13: 4 24 February 2014 Company / Sector Fair Value Recommendation InVision 49.0 Buy Technology: Cloud Computing ( 34) (Buy) Excellent margin trend in Prelims Share price performance
More informationChapter 10: Making Capital Investment Decisions. Faculty of Business Administration Lakehead University Spring 2003 May 21, 2003
Chapter 10: Making Capital Investment Decisions Faculty of Business Administration Lakehead University Spring 2003 May 21, 2003 Outline 10.1 Project Cash Flows: A First Look 10.2 Incremental Cash Flows
More informationAFM 371 Winter 2008 Chapter 16 - Capital Structure: Basic Concepts
AFM 371 Winter 2008 Chapter 16 - Capital Structure: Basic Concepts 1 / 24 Outline Background Capital Structure in Perfect Capital Markets Examples Leverage and Shareholder Returns Corporate Taxes 2 / 24
More informationApplied Corporate Finance. Unit 4
Applied Corporate Finance Unit 4 Capital Structure Types of Financing Financing Behaviours Process of Raising Capital Tradeoff of Debt Optimal Capital Structure Various approaches to arriving at the optimal
More informationCHAPTER 21: A FRAMEWORK FOR ANALYZING DIVIDEND POLICY
CHAPTER 21: A FRAMEWORK FOR ANALYZING DIVIDEND POLICY 21-1 a. Dividend Payout Ratio = (2 * 50)/480 = 20.83% b. Free Cash Flows to Equity this year Net Income $480 - (Cap Ex - Depr ) (1-DR) $210 - (Change
More informationHandout for Unit 4 for Applied Corporate Finance
Handout for Unit 4 for Applied Corporate Finance Unit 4 Capital Structure Contents 1. Types of Financing 2. Financing Choices 3. How much debt is good? 4. Debt Benefits vs Costs 5. Approaches to arriving
More informationKey Expense Assumptions
Key Expense Assumptions 204 The operating expenses are assumed to be 60% of the revenues at the parks, and 75% of revenues at the resort properties. Disney will also allocate corporate general and administrative
More informationEconomic Value Added (EVA)
Economic Value Added (EVA), 2018 Definition Features and problems Computation Economic Value Added (EVA) EVA is promoted by a consulting firm Stern Steward & Co., which was established in 1982 and pioneered
More informationCapital Structure Questions
Capital Structure Questions What do you think? Will the following firm characteristics result in the use of more or less debt? Large firms More tangible assets More lower risk; better access to capital
More informationUsing Microsoft Corporation to Demonstrate the Optimal Capital Structure Trade-off Theory
JOURNAL OF ECONOMICS AND FINANCE EDUCATION Volume 9 Number 2 Winter 2010 29 Using Microsoft Corporation to Demonstrate the Optimal Capital Structure Trade-off Theory John C. Gardner, Carl B. McGowan Jr.,
More informationNote on Valuing Equity Cash Flows
9-295-085 R E V : S E P T E M B E R 2 0, 2 012 T I M O T H Y L U E H R M A N Note on Valuing Equity Cash Flows This note introduces a discounted cash flow (DCF) methodology for valuing highly levered equity
More information1. True or false? Briefly explain.
1. True or false? Briefly explain. (a) Your firm has the opportunity to invest $20 million in a project with positive net present value. Even though this investment adds to the value of the firm, under
More informationLeverage and Capital Structure The structure of a firm s sources of long-term financing
70391 - Finance Leverage and Capital Structure The structure of a firm s sources of long-term financing 70391 Finance Fall 2016 Tepper School of Business Carnegie Mellon University c 2016 Chris Telmer.
More informationGiven the following information, what is the WACC for the following firm?
Chapter 1 Cost of Capital The required return for an asset is a function of the risk of the asset and the return to the investor is the same as the cost to the company. The firms cost of capital provides
More informationCHAPTER 15 COST OF CAPITAL
CHAPTER 15 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,
More informationChapter 12: Estimating the Cost of Capital
Chapter 12: Estimating the Cost of Capital -1 Chapter 12: Estimating the Cost of Capital Fundamental question: Where do we get the numbers to estimate the cost of capital? => How do we implement the CAPM
More informationValuation. Aswath Damodaran Aswath Damodaran 1
Valuation Aswath Damodaran http://www.stern.nyu.edu/~adamodar Aswath Damodaran 1 Some Initial Thoughts " One hundred thousand lemmings cannot be wrong" Graffiti Aswath Damodaran 2 A philosophical basis
More informationREVIEW FOR SECOND QUIZ. Show me the money
REVIEW FOR SECOND QUIZ Show me the money The skill set for this test Can you compute the cost of capital for a project (rather than a firm)? How do you estimate the cost of equity for a project? What debt
More informationTHE UNIVERSITY OF NEW SOUTH WALES JUNE / JULY 2006 FINS1613. Business Finance Final Exam
Student Name: Student ID Number: THE UNIVERSITY OF NEW SOUTH WALES JUNE / JULY 2006 FINS1613 Business Finance Final Exam (1) TIME ALLOWED - 2 hours (2) TOTAL NUMBER OF QUESTIONS - 50 (3) ANSWER ALL QUESTIONS
More information: Corporate Finance. Financing Projects
380.760: Corporate Finance Lecture 7: Capital Structure Professor Gordon M. Bodnar 2009 Gordon Bodnar, 2009 Financing Projects The capital structure decision the choice of securities a entrepreneur uses
More informationCorporate Finance - Final Exam QUESTIONS 78 terms by trunganhhung
Corporate Finance - Final Exam QUESTIONS 78 terms by trunganhhung Like this study set? Create a free account to save it. Create a free account Which one of the following best defines the variance of an
More information