FIN515_Homework_6_Juan_M_Gutierrez
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FIN515_Homework_6_Juan_M_Gutierrez

Course Number: FIN 515, Spring 2013

College/University: DeVry Bellevue

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Homework Assignment 6 Week # 6 Problems ( Pg.503) 12-1 AFN Equation Baxter Video Productss 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...

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Assignment Homework 6 Week # 6 Problems ( Pg.503) 12-1 AFN Equation Baxter Video Productss 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 Baxters additional funds needed for the coming year. Sales expect to raise at 20% Assets liabilities account payable notes payable accruals after-tax profit margin (MS) payout ration 2010 5,000,000 3,000,000 1,000,000 250,000 500,000 250,000 5% 70% 2011 6,000,000 ? ? ? ? ? Additional funds needed (AFN) = Projected increase in assets spontaneous increase in liabilities any increase in retained earnings AFN = (A*/S0)S - (L*/S0)S - MS1(1 - d) AFN = 3,000,000 5,000,000 1,000,000 - 500,000 1,000,000 5,000,000 - $0.05 6,000,000 AFN = 0.6 1,000,000 - 0.1 1,000,000 - 300,000 AFN = 600,000 - 100,000 - 90,000 AFN = 410,000 Answer: the AFN is at $410,000 Problems ( Pg.549-550) 13-2 Value of 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 EMCs value operations. Current of Free cash flow or FCF0 400,000 FCF1 WACC 420,000 12% Value of Operations: 420,000 420,000 6,000,000 Value of Operation = FCF1 /(WACC - g) 5% (12% - 5%) 7% Answer: the EMC's value of Operations is $ 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 2010 Free Cash Flow in millions 2011 Projected 2012 2013 $606.82 $667.52 $707.55 $750.00 first, find the growth rate, g = (750 - 707.55)/ 707.50 $0.06 Horizon Value: FCF ( 1+ g ) / (WACC - g) $707.55 $750.00 $15,000 $1.06 / / 0.11 0.05 0.06 Answer: the horizon continuing value at 2012 is $15,000 13-4 EROIC and MVA of Constant Growth Firm A company has capital of $200 million. It has an EROIC of 9%, forecasted constant growth of 5%, and a WACC of 10%. What is its value of operations? What is its intrinsic MVA? Hint : use equation 13-5 Cost of Capital EROIC constant growth WACC $200 9% 5% 10% What is the value of operations? Value of operation = Capital +[ Capital(EROIC - WACC)]/(WACC - g) VP = 200 million + [ 200 (9% - 10%)] / (10% - 5%): VP = VP = VP= VP= Intrinsic MVA = Value of Operations - Total Capital $ 160 million MVA= -$40 million Answer: Value of operations is $ 160 millions and the intrinsic MVA is at - $40 millions 200 200 $200 $160 millions 200 -0.01 -$2 -$40 $ 200 million / / 0.05 0.05 1- 0.70 0.30

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Indian Institute of Technology, Kharagpur - IM - IM132445
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Indian Institute of Technology, Kharagpur - IM - IM132445
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Indian Institute of Technology, Kharagpur - IM - IM132445
Indian Institute of Technology, Kharagpur - IM - IM132445
Indian Institute of Technology, Kharagpur - IM - IM132445
Indian Institute of Technology, Kharagpur - IM - IM132445
Indian Institute of Technology, Kharagpur - IM - IM132445
Indian Institute of Technology, Kharagpur - IM - IM132445
Indian Institute of Technology, Kharagpur - IM - IM132445
Indian Institute of Technology, Kharagpur - IM - IM132445
Indian Institute of Technology, Kharagpur - IM - IM132445