7.2.1 Aardvark_Problem

7.2.1 Aardvark_Problem - FINC202 FINC202 Lecture 14’s...

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Unformatted text preview: FINC202 FINC202 Lecture 14’s Lecture Problem 5 revisited The mess­up in the lecture was not an error in the problem, but in Warwick’s not immediately picking up on the real matter at issue This is covered in this mini­slideset. The confusion would have been avoided if the problem had specified values for Accrued Wages & Taxes and Accounts Payable rather than just the rather obscure (as distinct from apparently redundant) subscript to TA 1 Problem 5: Aardvark Ltd has • • • • Long­term Debt Notes Payable Equity Total Assets $34m, $6m $60m. $110m = Total Liabilities and Equity The costs of debt (before tax) and equity are estimated as 10% and 15% respectively. Aardvark’s tax rate is 20%. EBIT is estimated at $20 million. 2 What are Aardvark’s WACC, ROIC and EVA? Aardvark’s • • • • The solution is unchanged from in the The lecture lecture TA = $110 Long­term debt = $34 Notes Payable = $6 Equity = $60 Therefore Aardvark’s L* = $10 • Ie, accounts payable and accruals add up to the difference D does not equal Total Debt from the balance sheet D = total debt – L* Please see the next slide • Slide 22 from Lecture 12 3 A tricky issue concerning Debt, Equity tricky and Total Assets and Total Assets (TA) = Total Debt + Total Equity • But Total Debt = CL + Long­term Debt In the Finance discipline, Capital Structure is determined on Equity and Debt that excludes spontaneous liabilities L* • Current Liabilities are only included to the extent they contain Short­term negotiated Debt Ie, Notes Payable • 30­day Bills etc that behave like very short­term Bonds 4 Solution 5: D 34 + 6 wd = = D + E ( 34 + 6 ) + 60 40 = 100 = 0.4 ⇒ wS = 0.6 WACC $100 is still correct ⇒ WACC = 0.4 ( 0.1) ( 1 − 0.2 ) + 0.6 ( 0.15 ) = 0.024 + 0.1 = 0.122 5 Solution 5: EBIT ( 1 − tC ) ROIC = TOC EVA $20m ( 1 − 0.2 ) = 34m + 6m + 60m 16m = 100m = 0.16 EVA = TOC × ( ROIC − WACC ) = 100m ( 0.16 − 0.122 ) = 100m ( 0.038 ) = $3.8m 6 Regarding the General motors MVA, See The Economist, June 6th­12th 2009: This issue contains both an editorial and a good feature article on General Motors 7 ...
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