Ch12solns - -1 a Reinvestment Rate = g/ROC = 5/10 = 50 b Firm Value = 100(1.05(1.5.10.05 = $1050.00 c Value of Firm = 100.10 = $1,000.00 12-2 a

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Chapter 12 12-1 a. Reinvestment Rate = g/ROC = 5%/10% = 50% b. Firm Value = 100 (1.05)(1-.5)/(.10-.05) = $1050.00 c. Value of Firm = 100/.10 = $1,000.00 12-2 a. Reinvestment Rate = 5/15 = 33.3% b. Value of Firm = 100 (1.05)(1-.3333)/(.10-.05) = $1,400.00 12-3 Expected Growth rate next year = Reinvestment rate * ROC = 0.5 *.01 = 5% Expected FCFF next year = 100 (1.05) (1-.5) = $52.20 12-4 Net Income/(1-t) = EBT Earnings before interest and taxes = 50/.5 + 150 = $250; tax rate of 50%. Net Cap Ex = 200 -100 = $100.00 FCFF = 250 (1-.5) -100 = $25.00 Value of Firm = 25 (1.04)/(.11 - .04) = $371.43 12-5 Unlevered beta of other networking software firms with cash = 1.20 Unlevered beta corrected for cash = 1.20/(1-.10) = 1.33 Levered Beta for Netsoft's operating assets = 1.33 (1 + (1-.4) (15/85)) = 1.47 Cost of Equity for Netsoft = 6% + 1.47 (5.5%) = 14.09% Cost of Capital for Netsoft = 14.09% (.85) + 10% (1-.4) (.15) = 12.88% After-tax Operating Income = 200 (1-.40) = 120 Reinvestment rate = g/ ROC = 4/10 = 40% Value of Operating Assets = 120*1.04* (1-.40)/(.1288-.04) = $1,093.24 Value of Cash = $250.00 Value of Firm = $1,343.24 12-6 a. FCFF next year = 5 (1.20) - (4 - 2) (1.20) - (12 - 10) = $1.60 b. YearEBIT(1-t) Cap Ex Depreciation WC Chg in WC FCFF PV 1$ 6.00 $ 4.80 $ 2.40 $ 12.00 $ 2.00 $ 1.60 $ 1.43 2$7.20 $ 5.76 $ 2.88 $ 14.40 $ 2.40 $ 1.92 $ 1.53 3$8.64 $ 6.91 $ 3.46 $ 17.28 $ 2.88 $ 2.30 $ 1.64 4$10.37 $ 8.29 $ 4.15 $ 20.74 $ 3.46 $ 2.76 $ 1.76 5$12.44 $ 9.95 $ 4.98 $ 24.88 $ 4.15 $ 3.32 $ 1.88 6$13.06 $ 6.53 $ 5.23 $ 26.13 $ 1.24 $ 10.51
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c. Terminal value = 10.51/(.10- .05) = $ 210.26 d. Value of Operating Assets = PV of cash flows over next 5 years + PV of terminal value = (1.43+1.53+1.64+1.76+1.88)+210.26/(1.12 5 ) = $127.55 12-7 a. Value of Equity = Value of operating assets + cash and non-operating assets - debt = 127.55 + 10 - 15 = $122.55 b. Value per share = 122.55/5 = $ 24.51 c. Value of common stock = Value of Equity - Value of options = 122.55 -7 = $115.55 Value per share = 115.55/5 = $23.11 12-8 a. From the information given, we can work out the following information: Gross Profit 2483.125 Depreciation 960 EBIT 1523.125 Interest 320 EBT 1203.125 Taxes 433.125 Net Income 770 Hence Free Cash Flow to the Firm = EBIT(1-tax rate) +Depreciation - Capital Expenditures - Change in Working Capital = 1523.125(1-0.36) + 960 - 1200 = $734.8m. b. Reinvestment rate = (1200 –960)/(1523.125(1-.36)) = 24.62% Return on Capital = = 1523.125(1-0.36)/(4000+5000) = 10.83% Expected Growth Rate = (.2462) (.1083) = 2.67% The required rate of return on equity = 7% + 1.05(5.5%) = 12.775%; the cost of debt after-tax = 8%(1-0.36) = 5.12; the WACC = (4/16)(5.12) + (12/16)(12.775) = 10.86%. Value of firm (assuming perpetual growth) = 734.8 (1.0267)/ (.1086-.0267) =$ 9211
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This note was uploaded on 12/28/2009 for the course FEWEB CORPFIN taught by Professor Dorsman during the Spring '09 term at Vrije Universiteit Amsterdam.

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Ch12solns - -1 a Reinvestment Rate = g/ROC = 5/10 = 50 b Firm Value = 100(1.05(1.5.10.05 = $1050.00 c Value of Firm = 100.10 = $1,000.00 12-2 a

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