Chapter 15 a
yes Because this is a positive NPV project
According the the NPV model, should your firm purchase Company ZED as envisioned above?
$140. as given in the problem statement.
How much is ZED paying to purchase all of the company's stock?
PVtot = FCF/rE = 13.7995/0.0916 = 150.6496 perpetuity equation
If your firm purchases GoodStuff today and owns it forever, what is the present value of all the future FCFs that you will enjoy by owning the firm (PVE or PVtot)? Report your answer to three decimal places.
Tax = EBT * Tax Rate = 21.23*0.35 = 7.4305
Introduction: Valuing an Entity with the Simple Dividend Discount Model GoodStuff Inc. (GS) is a profitable entity, operating in steady-state forever. Your PE firm is considering purchasing all its stock at the asking price of $78 (E). Your firm believes that GS is operating at an optimum capital structure, with total Debt (D) of $52, and EquityMarket Value (E) of $78, for a D/(D+E) ratio of 40%. If your firm buys GS, you will operate the firm in its current steady-state condition forever. Key Rates rD, pretax 7.25% Income Tax rate 35.00% rE 9.16% What is the absolute value of the annual income tax of the firm?
FCFE = NI for a simple-accounting, steady-state firm. FCFE = EBT - Tax = 21.23 - 7.4305 = 13.7995
Valuing an Entity with the Simple Dividend Discount Model GoodStuff Inc. (GS) is a profitable entity, operating in steady-state forever. Your PE firm is considering purchasing all its stock at the asking price of $78 (E). Your firm believes that GS is operating at an optimum capital structure, with total Debt (D) of $52, and EquityMarket Value (E) of $78, for a D/(D+E) ratio of 40%. If your firm buys GS, you will operate the firm in its current steady-state condition forever. Key Rates rD, pretax 7.25% Income Tax rate 35.00% rE 9.16% What is the annual Free Cash Flow to Owners?
NPVE = -PP, E + Σ FCFE, i / (1 + rE)^Ti + SP, E / (1+rE)^3 Where i goes from 1 to 3. NPVE = -140 + 15.624* (1/(1+10.58%) + 1/(1+10.58%)^2 + 1/(1+10.58%)^3) + 218.4/(1+10.58%)^3 = 59.98
What is the NPV for the project "Purchase Company ZED, manage it for three years, then sell it"? Report your answer to two decimal places.
NPV = PVE - E = 150.650 - 78.0 = 72.65
What is the NPV of the project "buy this company and operate it forever." Report your answer to two decimal places.
Interest Expense = rD * BOP Loan Balance = 8% * $60 = 4.8 Interest Expense = rD, pretax * DebtBOP
What is the absolute value of the annual interest expense of Company ZED? Report your answer to two decimal places.
Tax = Tax Rate * EBT = 38% * (30-4.8) = 9.5760 In general, Tax = Tax Rate * EBT
What is the absolute value of the annual tax expense of Company ZED?
FCFE = NI + Deprec - Increase in Working Capital - CAPX + Increase in Debt For companies in steady state, the annual FCF's to shareholders are constant and equal to NI. = 15.6240
What is the annual Free Cash Flow to Owners (shareholders) of Company ZED? Report your answer to 4 decimal places.
15.624 = 30-4.8-9.5760 NI = Revenue - (All Expenses)
What is the annual net income (NI) of Company ZED? Report your answer to 4 decimal places.
Expected Market Value of firm = Future Expected PE Ratio * Future Expected Net Income. = 13.9785*15.6240 = 218.4000
What is your expected Sales Price for Company ZED? Hint: this is equal to the company's future expected PE ratio * Its future expected FCF. In this problem, the future expected PE ratio is given, and the future expected FCF is its (unchanging, steady-state, post purchase) NI.
