Accounting and Finance
Homework: Complete the following questions and turn in your solutions by the assigned due date. 1. Consider a firm with the financial characteristics described below. Use this information to answer the following valuation questions: WACC = 8.345% Financial Forecast for Year t+1: Book value of Equity = $60.0 mil EBIT $40.00 mil Book value of Debt = $100 mil Taxes (at 40%) -16.00 Mkt value of Debt = $100 mil = EBIT(1-T) 24.00 Cost of equity = 10.0% Reinvestment (at 20%) -4.80 Cost of debt = 4.0% = FCFF $19.20 mil Assuming cash flows grow at a stable rate of 3% per year, use discounted cash flows to estimate the value of the firm and the value of the firms equity. 2. You are trying to estimate beta for your company. Your company operates in 2 types of businesses- hospitability & airline. You gathered the following information about a group of companies operating in both industries: Hospitality: Firm Beta Debt Equity Tax Rate A 1.5 $5,800 $8,000 40% B 1.2 $500 $2,000 32% C 1.7 $1000 $3,000 35% Airline: Firm Beta Debt Equity Tax Rate S 1.35 $4,430 $10,000 33% D 0.9 $946 $10,000 42% Your firm has a debt equity ratio of 30% and faces a tax rate of 35%. Further analysis of your company indicated that 30% of total revenues are generated by the hospitality segment & the remainder by the airline segment. Estimate Beta for yourcompany. 3. of Abercrombie & Fitch. Based on Abercrombies future operating lease commitments, you estimate that the firms operating lease debt has a value of $2,648 million and you assume a depreciable life of 10 years on the operating lease assets. Abercrombies reported operating income equals $590 million. In addition, the firm has an operating lease expense of $410 million and a cost of debt equal to 3%. The firms effective and marginal tax rates are both 40%. Calculate the firms adjusted value of after-tax operating income after accounting for operating lease debt using each of the two methods we discussed in class. 4. You are valuing Genentec and have decided to capitalize the firms R&D expenses over a 10-year life. Genentecs operating income in the most recent year was $5,329 million and the R&D expense in the most recent year was $2,800 million. Using the firms past history of R&D expenses, you estimate that the current years R&D amortization is $1,931 million and the unamortized value of R&D remaining at the end of the year is $12,000 million. The effective and marginal tax rates are both equal to 36%. The firm also has CapEx of $1,730 million, depreciation of $1,280 million, and an increase in non-cash working capital of $320 million. Using this information, calculate the value of FCFF for this firm both before and after adjusting for the capitalization of R&D. 7. For the most recent fiscal year, Wal-Mart had earnings per share (EPS) of $5.13 and dividends per share of $1.59. The return on equity (ROE) for the firm is 18%, but is expected to increase during the coming year to 21%. Based on this information, calculate the fundamental growth in EPS for Wal-Mart in the coming year. 8. You are valuing a firm using a free cash flow to equity (FCFE) model. You have collected the following information for the firm. EBIT 1972.8 Net Income 572.8 Capital Expenditures 220.4 Depreciation 111.1 Increase in Working Capital 79.5 Debt-to-Capital 53.0% Return on Capital (ROC) 13.0% Return on Equity (ROE) 26% Tax Rate 38.0% Use the information above to calculate the Reinvestment Rate & growth rate in operating income.