Financial Statements, Cash Flow, and Taxes - Solutions3

# Financial Statements, Cash Flow, and Taxes - Solutions3 -...

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Old Exam Questions - Financial Statements, Cash Flow, and Taxes - Solutions Page 21 of 73 Pages FCF = NOPAT - NIOC = \$399 - \$100 = \$299 Proof: FCF \$299.00 Interest Payment - \$ 26.00 Interest Tax Shelter +\$ 10.40 Dividends - \$343.40 Total Needs - \$ 60.00 New Debt +\$ 60.00 Net Effect \$ 0.00 Total market value of the firm at Year 0 = (\$299) / (.09 - .04) = \$5,980 Total market value of the equity at Year 0 = \$5,980 - \$350 = \$5,630 Intrinsic price per share = \$5,630 / 1,000 = \$5.63 18. In addition to taxable earnings from operations of \$350,000, your firm has also received interest income of \$27,000, paid interest of \$56,000, received dividends of \$19,000, and paid dividends of \$93,000. Using the corporate tax table in Appendix D (end of this exam and you may assume that the average tax rate for the first \$100,000 is 22.25% instead of 22.3%), calculate the amount of taxes that the firm will owe. A. \$102,432 B. \$105,226 C. \$107,812 * D. \$110,663 E. \$113,109 Answer: D Earnings \$350,000 Interest Received \$ 27,000 Interest Paid - \$ 56,000 Dividends Received \$ 5,700 = (\$19,000)(0.30) Taxable Income \$326,700 Taxes = (\$100,000)(0.2225) + (\$326,700 - \$100,000)(0.39) Taxes = \$22,250 + \$88,413 = \$110,663 19. Assume that an analyst has examined your company and has estimated that the free cash flow at the end of the year (Year 1) will be \$450 million, that this free cash flow will grow at a constant rate of 8 percent per year, and that your company’s weighted average cost of capital is 12 percent. If the company currently has debt and preferred stock totaling \$4,500 million (4.5 billion), and if there are 200 million outstanding shares of common

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Old Exam Questions - Financial Statements, Cash Flow, and Taxes - Solutions Page 22 of 73 Pages stock, then determine what the intrinsic value of the company’s stock should be today (Year 0) on a per share basis. A. \$29.25 B. \$35.00 C. \$37.50 * D. \$33.75 E. \$31.00 Total Enterprise Value = (\$450,000,000) / (.12 - .08) = \$11,250,000,000 Value of Stock = \$11,250,000,000 - \$4,500,000,000 = \$6,750,000,000 Price = \$6,750,000,000 / 200,000,000 = \$33.75 20. Assume that your company has been given the following projections for the coming year: Sales = 20,000 units Sales price per unit = \$10 Variable cost per unit = \$7 Fixed costs = \$15,000 Bonds outstanding = \$43,950 K D on outstanding bonds = 7% Tax rate = 35% Shares of common stock outstanding = 10,000 shares Beta = 1.6 K RF = 8% K M = 12% Dividend payout ratio (DPR) = 40% Return on equity (ROE) = 20% Based on this information, determine what the current price per share should be. (Note: you may use the table below to help organize the data.)
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## This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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Financial Statements, Cash Flow, and Taxes - Solutions3 -...

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