HW4sol

# HW4sol - Solution to Problem Set 4 FINA 4200 Spring 2010 I...

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Solution to Problem Set 4 - FINA 4200 Spring 2010 I. Multiple Choices 1. b 2. b 3. b 4. b 5. a 6. c 7. b 8. e 9. d 10. b 11. b 12. b 13. a 14. a 15. b 16. b 17. b 18. b 19. b 20. a 21. a 22. a 23. b 24. a 25. c 26. b 27. b 28. d 29. c 30. d 31. d 32. d 33. b 34. c 35. e 36. e 37. c 38. c 39. e Explanations to multiple choice questions 6. FCF 0 : \$100 g: 5% WACC: 15% Value Ops = FCF 1 /(WACC – g) = FCF 0 (1 + g)/(WACC – g) = \$100(1 + 0.05)/(0.15 – 0.05) = \$105/0.1 = \$1,050 7. FCF 1 : -\$10 FCF 2 : \$20 g: 4% WACC: 14% First, find the horizon, or terminal, value: HV 2 = FCF 2 (1 + g)/(WACC – g) = \$20(1.04)/(0.14 – 0.04) = \$20.8/0.10 = \$208.00 Then find the PV of the free cash flows and the horizon value: Value of operations = -\$10/(1.14) 1 + (\$20 + \$208)/(1.14) 2 = -\$8.772 + \$175.439 = \$167 1

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8. Year: 1 2 3 FCF: -\$15 \$10 \$40 g: 5% WACC: 13% First, find the horizon, or terminal, value: HV 4 = FCF 3 (1 + g)/(WACC – g) = \$40(1.05)/(0.13 – 0.05) = \$525 Then find the PV of the free cash flows and the horizon value: Value of operations = -\$15/(1.13) + \$10/(1.13) 2 + (\$40 + \$525)/(1.13) 3 = \$386 9. Value of operations: \$750 Short-term investments: \$50 Notes payable: \$100 Long-term debt: \$200 Assuming that the book value of debt is close to its market value, the total market value of the company is: value market Total = + operations of Value assets operating - non of Value = \$750 + \$50 = \$800. Value of Equity = Total MV Long- and Short-term debt = \$500 . The book value of equity figures are irrelevant for this problem. Also, the accounts payable are not relevant because they were netted out when the FCF was calculated. 10. Value of operations: \$1,200 Short-term investments: \$100 Notes payable: \$120 Long-term debt: \$300 Preferred stock \$50 Shares outstanding: 30 Assuming that the book value of debt is close to its market value, the total market value of the company is: value market Total = + operations of Value assets operating - non of Value = \$1,200 + \$100 = \$1,300. Value of Equity = Total MV Long- and Short-term debt and preferred = \$830 2
Stock price = Value of Equity/Shares outstanding = \$27.67 The book value of equity figures are irrelevant for this problem. Also, the working capital account numbers are not relevant because they were netted out when the FCF was calculated. 11. Year: 1 2 3 Free cash flow: -\$20 \$42 \$45 WACC: 13% First, find the growth rate: g = \$45/\$42 – 1.0 = 7.14% Second, find the horizon, or terminal, value, at Year 2 HV 2 = FCF 3 /(WACC – g) = \$45/(0.13 – 0.0714) = \$768 Now find the PV of the FCFs and the horizon value: Value of operations = -\$20/(1.13) + (\$42 + \$768)/(1.13) 2 = \$617 18. We do not know if we are to the right or left of the crossover point. Therefore, the NPV of X may be less than the NPV of Y. 20.

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HW4sol - Solution to Problem Set 4 FINA 4200 Spring 2010 I...

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