Fi 515 Week 6 Homework
Managerial Finance.
FI515 Homework Week 6
Problems (p. 503)
12-1 AFN Equation
Baxter Video Products’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals.
The after tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year.
A0 = $3,000,000
∆S = $1,000,000
S0 = $5,000,000
L0 = $500,000
M = 5%
S1 = $6,000,000
POR = 70%
AFN = (A0/S0)∆S – (L0/S0)∆S – M * S1)(1 – POR)
= $1,000,000 – $1,000,000 – 0.05($6,000,000)(1 – 0.7)
= (0.6)($1,000,000) – (0.1)($1,000,000) – ($300,000)(0.3)
= $600,000 – $100,000 – $90,000
= $410,000.
Problems (pp. 549-550)
13-2 Value of Operations of Constant Growth Firm
13-3 Horizon Value
13-4 EROIC and MVA of Constant Growth Fir
Value of Operations of Constant Growth Firm
EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value of operations.
FCF = $400,000 g = 5%
WACC = 12%
Vop = PV of expected future free cash flow
Vop = = = $6,000,000
(13-3)
Horizon Value
Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2012, and the weighted average cost of capital is 11%. What is the horizon (continuing) value at 2012?
| Actual | Projected |
| 2010 | 2011 | 2012 | 2013 |
Free cash flow (millions of dollars) | $606.82 | $667.50 | $707.55 | $750.00 |
WACC = 11%
The growth rate in FCF from 2012 to 2013 is g=
FI515 Homework Week 6
Problems (p. 503)
12-1 AFN Equation
Baxter Video Products’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals.
The after tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year.
A0 = $3,000,000
∆S = $1,000,000
S0 = $5,000,000
L0 = $500,000
M = 5%
S1 = $6,000,000
POR = 70%
AFN = (A0/S0)∆S – (L0/S0)∆S – M * S1)(1 – POR)
= $1,000,000 – $1,000,000 – 0.05($6,000,000)(1 – 0.7)
= (0.6)($1,000,000) – (0.1)($1,000,000) – ($300,000)(0.3)
= $600,000 – $100,000 – $90,000
= $410,000.
Problems (pp. 549-550)
13-2 Value of Operations of Constant Growth Firm
13-3 Horizon Value
13-4 EROIC and MVA of Constant Growth Fir
Value of Operations of Constant Growth Firm
EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value of operations.
FCF = $400,000 g = 5%
WACC = 12%
Vop = PV of expected future free cash flow
Vop = = = $6,000,000
(13-3)
Horizon Value
Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2012, and the weighted average cost of capital is 11%. What is the horizon (continuing) value at 2012?
| Actual | Projected |
| 2010 | 2011 | 2012 | 2013 |
Free cash flow (millions of dollars) | $606.82 | $667.50 | $707.55 | $750.00 |
WACC = 11%
The growth rate in FCF from 2012 to 2013 is g=