F08fin Solutions to Chapter 6 Problems rev C

F08fin Solutions to Chapter 6 Problems rev C - Solutions to...

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Solutions to Chapter 6 Problems VALUATION HANDBOOK by Lloyd A. Levitin Professor of Clinical Finance & Commerce Marshall School of Business University of Southern California
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Chapter 6 Problem 1 Shown below is a balance sheet and income statement for a firm. Balance Sheet 2007 2006 2007 2006 Cash and marketable sec. 600 500 Accounts payable 1,200 1,000 Accounts receivable 1,000 800 Accrued expenses 400 500 Inventory 900 800 Long term debt 1,800 1,900 Property & plant, net 2,800 2,700 Common equity 1,900 1,400 Total assets 5,300 4,800 Total Liabilities & Equity 5,300 4,800 Income Statement – 2007 Revenues $6,000 Operating expenses 4,000 Interest expense 150 Income before tax 1,850 Income tax 666 Net income $1,184 a. What is the TOC at end of 2006 and 2007? 2006 2007 Debt + Equity – Cash 2,800 3,100 or Total assets – Cash – NIBLs 2,800 3,100 b. What is NOPAT for 2007? EBIT = 6,000 – 4,000 = 2,000 NOPAT = EBIT x (1 – t) = 2,000 x 1 – 666 = 1,280 1850 c. What is free cash flow for 2007? 1280 – (3,100 – 2,800) = 980 d. What is ROIC for 2007? ROIC = NOPAT = 1,280 = 45.7% TOC 2,800 Solutions to Chapter 6 – DCF Models – Enterprise Valuation 1
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Chapter 6 Problem 2 Compute the intrinsic value of the firm’s total operating capital for following firms and then compute how much value was added. Firm Long Term Expected ROIC Estimated WACC Long Term Expected Growth Rate Current Total Operating Capital Intrinsic Value Market Value Added A 10% 8% 5% $100 166.67 66.67 B 10% 8% 4% $100 150.00 50.00 C 10% 8% 6% $100 200.00 100.00 D 10% 9% 5% $100 125.00 25.00 E 10% 7% 5% $100 250.00 150.00 F 10% 12% 5% $100 71.43 (28.57) G 10% 12% 4% $100 75.00 (25.00) H 10% 12% 6% $100 66.67 (33.33) A V = TOC x ROIC – g = 100 x 10% – 5% = 166.67 WACC – g 8% – 5% B = 100 x 10% – 4% = 150.00 8% – 4% C = 100 x 10% – 6% = 200.00 8% – 6% D = 100 x 10% – 5% = 125.00 9% – 5% E = 100 x 10% – 5% = 250.00 7% – 5% F = 100 x 10% – 5% = 71.43 12% – 5% G = 100 x 10% – 4% = 75.00 12% – 4% H = 100 x 10% – 6% = 66.67 12% – 6% What conclusions can be drawn with respect to relationship of ROIC to WACC on value of TOC? What impact does growth have? Value created if ROIC > WACC Higher growth increases value if ROIC > WACC Higher growth decreases value if ROIC < WACC Solutions to Chapter 6 – DCF Models – Enterprise Valuation 2
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Chapter 6 Problem 3 You have assembled the following data on the following 4 companies: A B C D ROIC 10% 12% 7% 8% WACC 8% 10% 8% 10% Investment rate (IR) 40% 20% 30% 40% TOC (beginning of year) $100 $100 $100 $100 (1) Assuming the ROIC and investment rate remains constant, what is the expected growth rate of each firm? A g = ROIC x IR = 10% x 40% = 4% B g = ROIC x IR = 12% x 20% = 2.4% C g = ROIC x IR = 7% x 30% = 2.1% D g = ROIC x IR = 8% x 40% = 3.2% (2) What is the FCF for the current year for each firm? A FCF = NOPAT – Incr. TOC = ROIC x TOC – g(TOC) = 10% x 100 – 4%(100) = 6 B FCF = NOPAT – Incr. TOC = ROIC x TOC – g(TOC) = 12% x 100 – 2.4%(100) = 9.6 C FCF = ROIC x TOC – g(TOC) = 7% x 100 – 2.1%(100) = 4.9 D FCF = ROIC x TOC – g(TOC) = 8% x 100 – 3.2%(100) = 4.8 (3) What is the intrinsic value of the TOC for each firm? A V = FCF t+1 /(WACC – g) = 6/(.08 – .04) = 150 B V = FCF t+1 /(WACC – g) = 9.6/(.10 – .024) = 126.3 C V = FCF t+1 /(WACC – g) = 4.9/(.08 – .021) = 83.1 D V = FCF t+1 /(WACC – g) = 4.8/(.10 – .032) = 70.6 (4) What conclusions can you make?
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