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FIN 300 Study Guide - Midterm Guide: Net Present Value, Project A, Cash Flow

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purplefrog376
28 Oct 2015
School
U of M
Department
Finance
Course
FIN 300
Professor
Stefan Zeume

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Document Summary

True: false, income statement, balance sheet, statement of cash flows, tax reconciliation statement, shareholders" equity sheet, +,000, +,000, +,000, +,000, none of the above. In the year 2000, xyz corp. had total revenues of million, costs of goods sold of ,000, and other operating costs of ,000. During the year xyz corp"s sole debt liability was a million bank loan on which it pays an annual interest rate of 10%. The principal on the loan will not be repaid for several more years. Taxes paid in the year 2000 were ,000. There was no change in any working capital items. A firm"s major supplier has just changed its payment policy for its customers. In the past, the supplier required customers to pay for all delivered shipments within 90 days of receipt. Since the economy is slowing down, the supplier has changed the policy to allow customers up to 270 days to pay for all delivered shipments.

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Related Questions

Please help with question D

Last year Rattner Robotics had $5 million of operating income. Its depreciation expense was $1 million, its interest expense was $1 million, and its corporate tax rate was 40%. At year-end, it had $14 million in current asset, $3 million in accounts payable, $1 million in (expense) accrual’s, $2 million in notes payable, and $15 million in net plant and equipment. Rattner had no other current liabilities. Assume that Rattner's only noncash item was depreciation.

a. What was the company's net income?

b. What was its net operating working capitals (NOWC)?

c. What was its net working capital (NWC)?

d. Rattner had $12 million in net plant and equipment the prior year. Its net operating working capital has remained constant over time. What is the company's free cash flow (FCF) for the year that just ended?

e. Rattner had 500,000 common shares outstanding and the common stock amount on the balance sheet is $5 million. The company has not issued or repurchased common stock during last years. Last year's balance in retained earnings was $12 million and the firm paid out dividends of $1.2 million during the year. Develop Rattner's end-of-year Statement of StockHolders Equity.

What was the company's net income?

Company's net income = (operating income - interest expense)*(1-tax rate)

(5 -1)*(1-40%)

Company's net income = $ 2.40 Milliion

What was its net operating working capitals (NOWC)?

Net operating working capitals = current asset - accounts payable - accruals

14 - 3 - 1

Net operating working capitals = $ 10 Million

What was its net working capital (NWC)?

Net working capital = current asset - Current liabilty

14 - (3 + 1 + 2)

Net working capital = $ 8 Million

Rattner had $12 million in net plant and equipment the prior year. Its net operating working capital has remained constant over time. What is the company's free cash flow (FCF) for the year that just ended?

e. Rattner had 500,000 common shares outstanding and the common stock amount on the balance sheet is $5 million. The company has not issued or repurchased common stock during last years. Last year's balance in retained earnings was $12 million and the firm paid out dividends of $1.2 million during the year. Develop Rattner's end-of-year Statement of StockHolders Equity.

End of Year Statement of Stockholders Equity

Particulars

Common Stock

5,000,000.00

Retained earnings

10,800,000.00

Total Stockholders Equity

15,800,000.00

Retained earnings =last years earnings-dividend paid

12,000,000.00-1,200,000.00=10,800,000.00

Consider the following acquisition data regarding Washington Company and Orators Telecom Inc.:

Washington Company is considering an acquisition of Orators Telecom Inc. Washington Company estimates that acquiring Orators will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company.

Data Collected (in millions of Dollars)

Year 1 Year 2 Year 3
EBIT 12.0 14.4 18.0
Interest Expense 3.0 3.3 3.6
Debt 29.7 35.1 37.8
Total net operating capital 107.1 109.2 111.3

Orators is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements.

- Orators currently has a $16.00 million market value of equity and $10.40 million in debt.

- The risk-free rate is 5.5% with a 7.60% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity RsL of 13.10%.

- Orators's cost of debt is 7.50% at a tax rate of 35%.

- The projections assume that the company will have a post-horizon growth rate of 5.00%.

- Current total net operating capital is $104.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisition is $27 million.

- The firm has no nonoperating assets, such as marketable securities.

With the given information, use the free cash flow to equity (FCFE) approach to calculate the following values involved in the merger analysis:

1. FCFE horizon value: $139.07 million / $129.75 million / $129.11 million / $146.75 million

2. Value of FCFE: $111.95 million / $39.60 million / $109.17 million / $125.77 million

3. The estimated value of Orators's operations after the merger is more / less than the market value of Orators's equity. This means that the wealth of Orators's shareholders will increase / decrease if it merges with Washington rather than remaining as a stand-alone corporation.

BTR Warehousing, which is considering the acquiition of Galaxy Sun Corp., estimates that acquiring Galaxy Sun will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company:

Data collected (in millions of dollars)

Year 1 Year 2 Year 3
EBIT $14.0 $16.8 $21.0
Interest Expense 4.0 4.4 4.8
Debt 31.9 37.7 40.6
Total net operating capital 121.5 123.9 126.3

Galaxy Sun Corp. is a publicly traded company, and its market-determined pre-merger beta is 1.20. You also have the following information about the company and the projected statements:

a) Galaxy Sun currently has a $32.00 million market value of equity and $ 20.80 million in debt.

b) The risk-free rate is 4%, there is a 6.10% market risk premium, and the capital aset pricing model purchases a pre-merger required rate of return on equity of 11.32%.

c) Galaxy Sun's cost of debt is 6.00% at a tax rate of 35%.

d) The projections assume that the company will have a post-horizon growth rate of 5.00%.

e) Current total net operating capital is $118.0, and the sum of existing debt and debt required to maintain a constant capital structure at the time of acquisitionis $29 million.

f) The firm does not have any nonoperating assets such as marketable securities.

Given this information, use the adjusted present value (APV) approach to calculate the following values involved in merger analysis:

1. Unlevered cost of equity: 8.10%/ 6.82% / 9.22% / 10.50%

2. Horizontal value of unlevered cash flows: $211.99 million / $279.92 million / $266.59 million / $132.70 million

3. Horizontal value of tax shield: $41.80 million / $39.81 million / $66.35 million / $38.32 million

4. Unlevered value of operations: $64.28 million / $233.62 million / $235.75 million / $228.61 million

5. Value of tax shield: $35.94 million / $74.66 million / $62.57 million / $39.65 million

6. Value of operations: $138.94 million / $271.69 million / $268.26 million / $296.19 million

7. Thus, the total value of Galaxy Sun's equity is $250.89 million / $214.95 million / $43.48 million / $275.39 million

8. Supposse BTR Warehousing plans to use more debt in the first few years of theacquisition of Galaxy Sun Corp. Assuming that using more debt will not lead to an increse in bankruptcy costs for BTR Warehousing, the interest tax shields and tha value of the tax shield in the analyssis, will decrease / increase, leading to a higher / lower value of operations of the acquired firm.

9. The APV approach is considered useful for valuing acquisition targets, because the method involves finding the values of the unlevered firm and the interest tax shield separately and then summing those values. Why is it difficult to value certain types of acquisitions using the corporate valuation model?

- The acquiring firm immediately retires the target firm's old debt. Thus, the acquisition deal consists of only new debt in its capital structure.

- The acquiring firm usually assumes the debt of the target firm. Thus, old debt with different coupon rates usually becomes a part of the aquisition deal.