Old Exam Questions - Financial Statements, Cash Flow, and Taxes - Solutions
Page 51 of 73 Pages
A.
$6,000
B.
$4,000
C.
$7,000
D.
$5,000
*
E.
$3,000
MVA = NPV = $24,000 = (FCF / WACC) - Original Cost
MVA = NPV = $24,000 = ($28,000 / WACC) - $200,000
WACC = $28,000 / ($24,000 + $200,000) = 12.50%
EVA = NOPAT - (Capital)*(WACC) = $28,000 - ($200,000)*(.125) = $3,000
MVA = NPV = EVA / WACC = $3,000 / .125 = $24,000
50.
Now, instead of the WACC calculated above, assume that the firm initially raises the
$200,000 of capital by issuing $100,000 of debt at a before-tax cost of debt (r
D
) of
5.0% (the tax rate is 40%), and $100,000 of equity at a cost of stock (r
S
) of 13.0%: you
should now be able to calculate the WACC (which may not be the same as in the
problem above), the enterprise value, and the new market value of the firm’s equity.
Given this market value, and assuming that the firm does not rebalance back to a
50/50 debt equity ratio, but that WACC does remain at its original level, determine
what the new, implied cost of equity must be (HINT1: you can not unlever and relever
beta for this problem; you must use the logic that we discussed and demonstrated in
class. HINT2: work backwards from NOPAT to determine what EBIT must be, and
then work forward to determine, and look at the value of, interest payments versus
dividend payments.)
A.
9.64%
B.
9.28%
C.
9.82%
*
D.
10.00%
E.
9.46%
WACC = (0.05)*(1-.40)*(50%) + (0.13)*(50%) = 1.50% + 6.50% = 8.0%
Enterprise Value (EV) = $28,000 / .08 = $350,000
MV Equity = Enterprise Value - Debt = $350,000 - $100,000 = $250,000
EBIT = NOPAT / (1-T) = $28,000 / (1 - .40) = $46,666.67
EBIT
$46,666.67
Interest
- $ 5,000.00
/ .05 = $100,000 (MV of Debt at r
D
= 5.0%)
EBT
$41,666.67
Taxes
- $16,666.67
Net Income
$25,000.00 / 0.10 = $250,000
(MV of Equity at r
S
= 10.0%)