F08fin rev.Sol. to Chapter 5 Problems rev C

# F08fin rev.Sol. to Chapter 5 Problems rev C - Solutions to...

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Solutions to Chapter 5 Problems VALUATION HANDBOOK by Lloyd A. Levitin Marshall School of Business University of Southern California

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Chapter 5 Problem 1 Shown below is selected data from Safeway, Inc. financial statements for 2007 (amounts in millions): Sales 42,286 Net income 888 Total assets (Y/E 2007) 17,651 Total assets (Y/E 2006) 16,274 Stockholders’ equity (Y/E 2007) 6,702 Stockholders’ equity (Y/E 2006) 5,667 Compute ROE and decompose it using the traditional approach where ROE = Net income margin x Asset turnover x Leverage Net income margin = Net income = 888 = 2.10% Sales 42,286 Asset turnover = Sales = 42,286 = 2.6 Assets 16,274 Leverage = Assets = 16,274 = 2.87 Equity 5,667 ROE = Net income = 888 = 15.7% Equity 5,667 ROE = Net income margin x asset turnover x leverage = 2.10% x 2.6 x 2.87 = 15.7% Solutions to Chapter 5 – Business Strategy and Financial Analysis 1
Chapter 5 Problem 2 You calculated the following numbers from the financial statements for a firm for 2007: EBIT/Sales 10% Effective tax rate 40% Sales/TOC 2.0 What is the firm’s ROIC for 2007? EBIT/sales 10% NOPAT/Sales 6% ROIC = NOPAT/sales x Sales/TOC = 6% x 2 = 12% Problem 3 Assume: NOPAT – 2007 \$ 1,000 TOC 1/1/07 \$10,000 1/1/08 \$12,000 What is the ROIC for 2007? ROIC = 1,000/10,0000 = 10% Problem 4 Assume: EBIT \$ 1,000 Tax rate 30% What is NOPAT? NOPAT = 1,000 x (1 – 30%) = 700 Solutions to Chapter 5 – Business Strategy and Financial Analysis 2

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Chapter 5 Problem 5 Assume the following income statement for X Co. in 2007. Sales \$10,000 CGS 6,000 Oper. Exp. 2,000 Operating income \$ 2,000 Tax 800 Net income \$ 1,200 Depreciation reported in SCF \$ 500 A. What is EBIT? EBIT = 2,000 B. What is EBITDA? EBITDA = 2,000 + 500 = 2,500 C. What is NOPAT? NOPAT = EBIT x (1 – t) = 2,000 x 1 – 800 = 1,200 2,000 Problem 6 A firm reports the following items on its most recent balance sheet: Short term debt \$100 Long term debt 200 Shareholders’ equity 700 Cash 50 Marketable securities 100 Based on this information, what is the book value of the firm’s total operating capital? TOC = 100 + 200 + 700 – 50 – 100 = 850 Solutions to Chapter 5 – Business Strategy and Financial Analysis 3
Chapter 5 Problem 7 Fast Express Co. asked you to compute its WACC. You are given the following information: Cost of debt (long term) 6% Corporate tax rate 40% Target debt ratio 30% Beta 1.20 Yield on long-term government bonds 4% Market risk premium 6% WACC = Kd ( 1 – t) D + Ke E D + E D + E = 6% (0.6) (0.3) + 11.2% (0.7) =8.92% = 1.08% + 7.8% = 8.92% Ke = R f + B(MRP) Ke = 4% + 1.2(6%) = 11.2% Solutions to Chapter 5 – Business Strategy and Financial Analysis 4

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Chapter 5 Problem 8 From the following data, calculate WACC using CAPM. U.S. Government long-term bond rate
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## This note was uploaded on 10/06/2008 for the course FBE 421 taught by Professor Plotts during the Fall '07 term at USC.

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F08fin rev.Sol. to Chapter 5 Problems rev C - Solutions to...

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