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# ch12solns - -1 a Reinvestment Rate = g/ROC = 5/10 = 50 b...

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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. Year EBIT(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 million c. Value of Equity = Value of Firm – Debt value = \$9211 - \$3800 = \$ 6411 million Value of Equity per share = \$ 6411 million/ 200 = \$ 32.06
12-9 a., b. From the information given, we can compute the following: 1993 1994 1995 1996 1997 1998 1999 Revenues 13500 14782.50 16186.84 17724.59 19408.42 21252.22 22102.31 EBITDA 1290 1412.55 1546.74 1693.68 1854.58 2030.77 2223.69 Interest 215 215.00 215.00 215.00 215.00 215.00 Depreciation 400 438.00 479.61 525.17 575.06 629.70 689.52 Cap. Exp 450 492.75 539.56 590.82 646.95 708.41 689.52 Working Capital 945 1034.78 1133.08 1240.72 1358.59 1487.66 1547.16 FCFF 440.21 482.02 527.82 577.96 632.87 861.00 PV(FCFF) 402.50 440.74 482.61 528.46 578.66

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