Advanced Finance

8) What would BV's 1988 earnings per share be after all of the above adjustments?

b.What are the amounts and timing of the acquisition investment’s free cash flow from 2013 through 2022?

24) A firm has assets of $250 million, of which $25 million is cash. It has debt of $100 million. If the firm were to repurchase $10 million of its stock, what would its new debt-to-equity ratio be?

iii. Prepare a basic discounted cash flow analysis; i.e. compute incremental cash flows and a terminal value, and discount them at a weighted average cost of capital. Can you do a multiples-type analysis here as well?

a. What risk-free rate and risk premium did you use in calculating the cost of equity for each division? Why did you choose these numbers?

Solutions to Valuation Questions 1. Assume you expect a company’s net income to remain stable at $1,100 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company’s β = 1.5, the market risk premium is 4% and the 20-30 year yield on risk free treasury bonds is 5%. Finally, assume the company has 1,000 shares of common stock outstanding. a. Use the CAPM to estimate the company’s equity cost of capital. • re = RF + β * (RM – RF) = 0.05 + 1.5 * 0.04 = 11% b. Compute the expected net distributions to stockholders for each future year. • D = NI – ΔCE = $1,100 – 0 = $1,100 c. Use the

Explain what shareholders would receive in exchange for (a) old common shares, (b) old class B shares, and (c) old shares held in the employee saving plan.

Further, we would pay off the debt using our excess free cash flow to pay off the debt. By the end of the 5th year, we would sell the firm and gain from any excess value found within the firm.

c. Is your estimate of Lex’s cost of equity appropriate as a discount rate for Lex’s total operating cash flows? Why or why not?

Comments from teacher: In question 1, why do we use these equitation’s, explain and show then, i.e. ROE can go up with more leverage. More on comparables. In Q1 assumptions explained, that are then used in DCF. Max for question 1 and 2, two pages. Must power to put in Q3. Deduct tax in table 3. In DCF, show more how calculated and assumption missing about other income and corporate expenses. Table 6 to be fixed (already been done). Skip in DCF advantage and disadvantage. Do table 4 different, use Exhibit 11, value range, use median value and calculate enterprise value with multiples en deduct net debt 318,5 and get equity value. Explain better in main text footnote 12. . Use

As you can see in the graph below, the terminal value for the company if it takes the equity route is about $106M, where if it takes the debt route its terminal value will be about $45M.

c. Above the indifference or break-even point the increase in EPS for all equity plans is less than debt-equity plans.

Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that

(10 points) Mango, Inc. has had debt with market value of $1 million that has paid a 6% coupon and has had an expiration date that is far, far away. The expected annual earnings before interest and taxes for the firm are $2 million and the firm has not grown, nor does it have plans for any growth. The firm however has just raised more equity to retire all its debt. If the required rate of return to equity-holders (after the capital structure change) is now 20%, what is the market value of the firm? Assume there are no taxes. (Enter just the number without the $ sign or a comma; round to the nearest whole dollar.)

1. In the year just ended, the Madison Badger Memorabilia Company, Inc., had sales of $465,000. It expects sales to grow by 10% in the coming year, by 8% the next year, and by 6% per year perpetually after that. The company has neither capital expenditures nor depreciation. There is no working capital requirement. EBIT is 20% of sales, and the company’s tax rate is 30%. MBMCI has $90,000 in cash, and $60,000 in debt. It has 20,000 shares of common stock outstanding, and has a weighted average cost of capital of 11%. Estimate the price of a share of MBMCI stock today.