fin3403 ch 10 hw

Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 9%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2?

$96.24 mil Year 0- 81 Year 1- 81*1.09 = 88.29 Year 2- 88.29*1.09 =96.2361

Carbondale Oil announces that a well that it has sunk in a new oil province has shown the existence of substantial oil reserves. The exploitation of these reserves is expected to increase Carbondale's free cash flow by $100 million per year for eight years. If investors had not been expecting this news, what is the most likely effect on Carbondale's stock price upon the announcement, given that Carbondale has 80 million shares outstanding, no debt, and an equity cost of capital of 11%?

rise by $6.43 Find PV I = 11% N = 8 Pmt = -100 PV = 514.61 Price= (514.61/80) =$6.43

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $600 million, EBITDA of $84 million, excess cash of $68 million, $18 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the best estimate of the firm's share price? Table can be found ch10 hw question 11

$7.17 Sales- 600 EV/Sales- 1.35 (found in table) EV = 600*1.35 = 810 cash- 68 debt- 18 shares- 120 Price= (810+68-18)/120= $7.17

Aerelon Airways, a commercial airline, suffers a major crash. As a result, passengers are considered to be less likely to choose Aerelon as their carrier, and it is expected free cash flows will fall by $15million per year for five years. If Aerelon has 55 million shares outstanding, an equity cost of capital of 10%, and no debt, by how much would Aerelon's shares be expected to fall in price as a result of this accident?

$1.03 Find PV I = 10 N = 5 Pmt = -15 PV = 56.8618 56.8618/55 = $1.03

Gonzales Corporation generated free cash flow of $86 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $275 million, and 100 million shares outstanding, what is Gonzales Corporation's expected current share price?

$12.49 Year 0- 86 mil Year 1- 94.6 mil, because 86*1.1 Year 2- 104.06 mil, because 94.6*1.1 Year 3- 108.2224 mil, because 104.06*1.04 Find Value in Year 2 =FCF3/r-g =108.2224/.11-.04 =1546.034 Find PV using NPV Cf1- 94.6 Cf2- 104.06+1546.034 NPV, I=11% NPV = 1424.48 Enterprise Value = NPV + Cash - Debt =1424.48+100-275 =1249.48 Price = Enterprise Value/shares outstanding =1249.48/100 =12.49

General Industries is expected to generate the above free cash flows over the next five years, after which free cash flows are expected to grow at a rate of 5% per year. If the weighted average cost of capital is 9% and General Industries has cash of $15 million, debt of $45 million, and 80 million shares outstanding, what is General Industries' expected current share price? FCF Year 1- 22 mil Year 2- 26 mil Year 3- 29 mil Year 4- 30 mil Year 5- 32 mil

$7.78 Year 6- 32*1.05= 33.6 mil Value in Year 5 =33.6/.09-.05 = 840 Find PV using NPV Cf1-22 Cf2- 26 Cf3- 29 Cf4- 30 Cf5- 32+840 NPV, I = 9% PV = 652.4534 Price = (652.4534+15-45)/80 =$7.78

Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. Banco industries has a weighted average cost of capital of 11%, $40 million in cash, $70 million in debt, and 18 million shares outstanding, which of the following is the best estimate of Banco's stock price at the start of year 1? FCF Forecast ($ million) Year- 0 1 2 3 4 Sales- 240 270 290 310 325.5 Growth versus Prior Year- 12.5% 7.4% 6.9% 5.0% EBIT (10% of Sales)- 27.00 29.00 31.00 32.55 Less: Income Tax (37%)- (9.99) (10.73) (11.47) (12.44) Less Increase in NWC (12% of Change in Sales)- 3.6 2.4 2.4 1.86 Free Cash Flow- 13.41 15.87 17.13 18.65

$13.04 Find Current Price FCF Year 5- 18.65*1.05 = 19.5825 Value in Year 4 = 19.5825/.11-.05 =326.375 Find PV using NPV Cf1-13.41 Cf2-15.87 Cf3-17.13 Cf4- 18.65+326.375 I = 11%, NPV=264.72 Current Price= (PV+Cash-Debt)/shares =(264.72+40-70)/18 =$13.04

Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 10%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 12% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 2?

$1384.24 million Year 0- 88 mil Year 1- 96.8 mil, because 88*1.1 Year 2- 106.48 mil Year 3- 110.7 mil, because 106.48*1.04 Value in Year 2 = Year 3 FCF/r-g Value in Year 2= 110.7/.12-.04 = 1384.24 million

Advanced Chemical Industries is awaiting the verdict from a court case over whether it is liable for the clean-up of wastes on a disused factory site. If it is liable, this will result in a reduction of its free cash flow by $11 million per year for ten years. If it is not liable, there will be no effect. On the close of trading the day before the announcement of the verdict, Advanced Chemicals was trading at $20 per share. Most investors calculate that there is a 100% chance that Advanced Chemicals will have a verdict returned against them. One investor, Jo, has performed extensive research into the outcome of the trial and estimates that there is no chance Advanced Chemicals will have a verdict returned against them. Given that Advanced Chemicals has 40 million shares outstanding and an equity cost of capital of 6% with no debt, Jo's estimate of the value of a share of Advanced Chemicals would be how much more than the market price?

$2.02 Find PV I = 6% N = 10 Pmt = -11 PV = 80.96 Price = 80.96/40 = $2.02

Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. Banco industries has a weighted average cost of capital of 11%, $40 million in cash, $70 million in debt, and 18 million shares outstanding. If Banco Industries can reduce its operating expenses so that EBIT becomes 12% of sales, by how much will its stock price increase? FCF Forecast ($ million) Year- 0 1 2 3 4 Sales- 240 270 290 310 325.5 Growth versus Prior Year- 12.5% 7.4% 6.9% 5.0% EBIT (10% of Sales)- 27.00 29.00 31.00 32.55 Less: Income Tax (37%)- (9.99) (10.73) (11.47) (12.44) Less Increase in NWC (12% of Change in Sales)- 3.6 2.4 2.4 1.86 Free Cash Flow- 13.41 15.87 17.13 18.65

$3.27 Find Current Price FCF Year 5- 18.65*1.05 = 19.5825 Value in Year 4 = 19.5825/.11-.05 =326.375 Find PV using NPV Cf1-13.41 Cf2-15.87 Cf3-17.13 Cf4- 18.65+326.375 I = 11%, NPV=264.72 Current Price= (PV+Cash-Debt)/shares =(264.72+40-70)/18 =$13.04 EBIT becomes 12% of Sales New Sales 270*.12 = 32.4 290*.12 = 34.8 310*.12 = 37.2 325.5*.12 = 39.06 New Income Tax- 32.4*.37 = (11.988) 34.8*.37 = (12.876) 37.2*.37 = (13.764) 39.06*.37 = (14.4522) New FCF =EBIT-Income tax-NWC Year 1- 32.4-11.988-3.6=16.812 Year 2- 34.8-12.876-2.4=19.524 Year 3- 37.2-13.764-2.4=21.036 Year 4- 39.06-14.4522-1.86=22.7478 Year 5- 22.7478*1.05 =23.8852 Value in Year 4 =23.8852/.11-.05 =398.0867 Find PV using NPV Cf1- 16.812 Cf2- 19.524 Cf3- 21.036 Cf4- 22.7478+398.0867 NPV, I = 11% PV = 323.54 New Price = (323.54+40-70)/18 =$16.31 Difference= $16.31-13.04 = $3.27

On a particular date, FedEx has a stock price of $89.27 and an EPS of $7.11. Its competitor, UPS, had an EPS of $0.38. What would be the expected price of UPS stock on this date, if estimated using the method of comparables?

$4.77 P/E of Fed Ex = Stock price/EPS =89.27/7.11 = 12.5556 UPS expected stock price = (UPS EPS)*(12.55556) .38*12.5556= $4.77

Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 6% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of $60 million, and 30 million shares outstanding, what is Conundrum's expected terminal enterprise value at year 4? FCF Year 1- 12 mil Year 2- 18 mil Year 3- 22 mil Year 4- 26 mil

$459.3 million Year 5- 26*1.06 = 27.6 million Value in Year 4 =27.6/.12-.06 =$459.3 mil

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $640 million, EBITDA of $84 million, excess cash of $67 million, $14 million of debt, and 120 million shares outstanding. If the average enterprise value to sales for comparable businesses is used, which of the following is the range of reasonable share price estimates? To see table, look on Ch10 question 7

$6.27 to $8.86 Sales- 640 EV/Sales- 1.35 (found in table) EV = 640*1.35 = 864 cash- 67 debt- 14 shares- 120 Price= (864+67-14)/120 =7.64 Using max and min from table under EV/Sales 7.64*(1-.18) = 6.27 7.64*(1+.16) = 8.86

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Another newspaper publishing firm (not shown) had sales of $620 million, EBITDA of $81 million, excess cash of $62 million, $11 million of debt, and 120 million shares outstanding. If the firm had an EPS of $0.41, what is the difference between the estimated share price of this firm if the average price-earnings ratio is used and the estimated share price if the average enterprise value/EBITDA ratio is used? Table can be found in ch10 hw question 14

-$0.13 EBITDA- 81 EV/EBITDA- 6.44 (found in the table) EV = 6.44*81 = 521.64 cash- 62 debt- 11 shares- 120 Price= (521.64+62-11)/120 =$4.77 EPS- $0.41 P/E- $11.33 Price= .41(11.33) = 4.6453 Difference= 4.77-4.6453 = $0.13

The table above shows the stock prices and multiples for a number of firms in the newspaper publishing industry. Which of the following ratios would most likely be the most reliable in determining the stock price of a comparable firm? table found ch10 hw question 12

Enterprise Value/Sales The enterprise value/sales method has the tightest range between minimum and maximum according to the table