Unformatted text preview: 121 AFN Equation
Baxter Video Product’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in
2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must
grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting
of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after tax
profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to
forecast Baxter’s additional funds needed for the coming year.
AFN = (A*/S0)∆S  (L*/S0)∆S  MS1(1  d)
AFN = $1,000,000  $1,000,000  0.05($6,000,000)(1  0.7)
AFN = (0.6)($1,000,000)  (0.1)($1,000,000)  ($300,000)(0.3)
AFN = $600,000  $100,000  $90,000
AFN = $410,000
132 Value of Operations of Constant Growth Firm
EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow at
a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value of
operations.
Vop = FCF(1+g)/WACCg
Vop = $400,000(1.05)/0.120.05
Vop = $6,000,000
133 Horizon Value
Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected
to be constant after 2012, and the weighted average cost of capital is 11%. What is the horizon
(continuing) value at 2012? 134 EROIC and MVA of Constant Growth Firm
A company has capital of $200 million. It has an EROIC of 9%, forecasted constant growth of 5%, and a
WACC of 10%. What is its value of operations? What is its intrinsic MVA? ...
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This note was uploaded on 10/02/2011 for the course FINANCE 515 taught by Professor Mclean during the Spring '08 term at Keller Graduate School of Management.
 Spring '08
 McLean

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