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Homework_6_Solutions - Homework#6 Solutions FIN340 FALL...

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1 Homework #6 Solutions FIN340 – FALL 2006 Professor Gormley, gormley9wustl.edu Distributed: November 28 th , 2006 Due: Tuesday, December 5 th , 2006 [in class] Note: Please show all work and circle your final answer to make grading easier. Homework Assignments may be done in groups of up to four students. You can find the answers to Questions #1-4 in the MS Excel File “Homework (6) Solutions”. I’ve included a printout of what your answers should have looked like below. Suggested answers to Question #5 are also below. 1. 2. 3.
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Summary of Assumptions: Sales Growth 3.87% Operating Margin Growth 0.32% Depreciation Growth Rate 5.60% Cap Ex (Annual Growth Rate) 2.99% Working Capital (% of sales) -1.10% Tax Rate 38.50% Long-Term FCF Growth Rate 4.00% Given Data: Equity Beta 0.60 Excess Cash-on-hand for 1995 (in millions) 192.00 Market Data: Market Risk Premium 7.51% Risk Free Rate 4.60% Market Value of Equity (2005) 35228 Market Value of Debt (2005) 7990 Discount Rates: Cost of Equity (in 2005) 9.11% Cost of Debt 5.60% WACC (in 2005) 8.06% Unlevered Cost of Equity 8.68% Cost of Equity (at target leverage) 9.01% WACC (with target leverage) 8.17% Values (from Sequential Valuation): Firm Value 53099 Debt Value 7990 Equity Value 45109 Stock Prices: Stock Price Based on Valuation $58.58 Share Price on Value Line $41.52
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Value Line Data, Trend Analysis, and Forecasts 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Sales 10884 11066 11246 11704 12262 12911 13566 14147 14934 15105 Sales Growth 5.25% 1.67% 1.63% 4.07% 4.77% 5.29% 5.07% 4.28% 5.56% 1.15% Operating Margin 24.10% 24.70% 25.50% 26.30% 26.90% 27.60% 28.20% 28.80% 28.80% 26.00% Operating Margin Growth 1.30% 0.60% 0.80% 0.80% 0.60% 0.70% 0.60% 0.60% 0.00% -2.80% Depreciation 593.9 683.7 738.4 777 803.5 834.5 847.3 877.2 932.7 970 Depreciation Growth Rate 5.0% 15.1% 8.0% 5.2% 3.4% 3.9% 1.5% 3.5% 6.3% 4.0% Net Profit 1122.7 1179.2 1233.3 1402.2 1551.6 1704.5 1933.8 2075.9 2240.3 1955 Income Tax Rate 38.90% 38.40% 38.00% 38.00% 38.00% 38.40% 39.70% 38.70% 38.80% 38.50% Working Capital 34.9 83.2 -89.9 -386.6 -127.8 -181.9 -283 -226.9 -150.6 -125
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