Question 1) Value Drivers and Horizon Value of Constant Growth Firm
You are given the following forecasted information for the year 2016: sales = $300,000,000, operating profitability (OP) = 7%, capital requirements (CR) = 39%, growth (g) = 6%, and the weighted average cost of capital (WACC) = 9.4%. If these values remain constant, what is the horizon value (i.e., the 2016 value of operations)? Do not round intermediate steps. Round answer to the nearest $1000.
Question 2) Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant 3% rate. Dozier's weighted average cost of capital is WACC 13%.
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Year
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1
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2
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3
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Free cash flow ($ millions)
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- $20
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$30
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$40
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a. What is Dozier's terminal, or horizon, value? (Hint: Find the value of all free cash flows beyond Year 3 discounted back to Year 3.). Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places
b. What is the current value of operations for Dozier? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places
c. Suppose Dozier has $12 million in marketable securities, $100 million in debt, and 15 million shares of stock. What is the price per share? Round your answer to the nearest cent.
Value of Equity
The balance sheet of Hutter Amalgamated is shown below. If the 12/31/2012 value of operations is $797 million, what is the 12/31/2012 intrinsic market value of equity? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000.
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Balance Sheet, December 31, 2012 (Millions of Dollars)
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Assets
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Liabilities and Equity
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Cash
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$ 20.0
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Accounts payable
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$ 19.0
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Marketable securities
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71.0
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Notes payable
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146.0
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Accounts receivable
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100.0
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Accruals
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51.0
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Inventories
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200.0
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Total current liabilities
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$216.0
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Total current assets
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$391.0
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Long-term bonds
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189.0
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Net plant and equipment
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279.0
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Preferred stock
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76.0
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Common stock (par plus PIC)
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100.0
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Retained earnings
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89.0
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Common equity
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$189.0
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Total assets
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$670.0
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Total liabilities and equity
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$670.0
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Investment Outlay
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $12 million, and production and sales will require an initial $1 million investment in net operating working capital. The company's tax rate is 40%.
d. What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.?$
e. The company spent and expensed $150,000 on research related to the project last year. Would this change your answer??-Select-YesNo
Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer??The project's cost will -Select-increasedecreasenot change .
Operating Cash Flow
The financial staff of Cairn Communications has identified the following information for the first year of the rollout of its new proposed service:
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Projected sales
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$25 million
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Operating costs (not including depreciation)
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11 million
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Depreciation
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6 million
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Interest expense
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4 million
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The company faces a 30% tax rate. What is the project's operating cash flow for the first year (t = 1)? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
Net Salvage Value
Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $24 million, of which 80% has been depreciated. The used equipment can be sold today for $8.4 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
New-Project Analysis
You have been asked by the president of your company to evaluate the proposed acquisition of a new chromatograph for the firm's R&D department. The equipment's basic price is $130,000, and it would cost another $19,500 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class (the applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%), would be sold after 3 years for $45,500. Use of the equipment would require an increase in net working capital (spare parts inventory) of $6,500. The chromatograph would have no effect on revenues, but it is expected to save the firm $39,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40%.
f. What is the Year-0 net cash flow?
g. What are the net operating cash flows in Years 1, 2, and 3? Round your answers to the nearest dollar.
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j. Year 1
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k. $
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l. Year 2
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m. $
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n. Year 3
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o. $
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h. What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar.?$
i. If the project's cost of capital is 14%, what is the NPV of the project? Round your answer to the nearest dollar.?$
Replacement Analysis
St. Johns River Shipyards's welding machine is 15 years old, fully depreciated, obsolete, and has no salvage value. However, even though it is obsolete, it is perfectly functional as originally designed and can be used for quite a while longer. The new welder will cost $82,500, and have an estimated life of 8 years with no salvage value. The new welder will be much more efficient, however, and this enhanced efficiency will increase earnings before depreciation from $26,000 to $52,000 per year. The new machine will be depreciated over its 5-year MACRS recovery period, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The applicable corporate tax rate is 40%, and the firm's WACC is 14%. Should the old welder be replaced by the new one?
Old welder -Select-shouldshould not be replaced.??What is the NPV of the project? Round your answer to the nearest cent.
Risky Cash Flows
The Bartram-Pulley Company (BPC) must decide between two mutually exclusive investment projects. Each project costs $6,500 and has an expected life of 3 years. Annual net cash flows from each project begin 1 year after the initial investment is made and have the following probability distributions:
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PROJECT A
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PROJECT B
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Probability
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Net Cash
Flow
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Probability
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Net Cash
Flow
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0.2
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$5,000
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0.2
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$ 0
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0.6
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6,750
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0.6
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6,750
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0.2
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8,000
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0.2
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19,000
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BPC has decided to evaluate the riskier project at a 13% rate and the less risky project at a 8% rate.
j. What is the expected value of the annual net cash flows from each project? Round your answers to nearest dollar.
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Project A
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Project B
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Net cash flow
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$
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$
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k. ?What is the coefficient of variation (CV)?
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σ (to the nearest whole number)
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CV (to 2 decimal places)
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Project A
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$
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Project B
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$
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L. What is the risk-adjusted NPV of each project? Round your answer to the nearest dollar.
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mm. Project A
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nn.
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oo. $
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pp. Project B
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qq.
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rr. $
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