The Book Nook FCFF Example Problem

The Book Nook FCFF Example Problem - growth rate forever...

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The Book Nook Income Statement 20x2 Net Sales  $ 43,053  Cost of Goods Sold  $ 28,269  Operating Expense  $   4,032  Depreciation  $    2,106   EBIT  $    8,646  Interest Paid  $    2,822   EBT  $    5,824  Taxes   $   2,038  Net Income  $    3,786  The Book Nook Comparative Balance Sheet Assets 20X1 20X2 20X1 20X2 Cash $1,389  $1,814  A/P $12,186  $11,513  A/R $11,827  $13,686  N/P $448  $0  Inventory $14,672   $17,248   Total Current Liab $12,634  $11,513  Total Current Assets $27,888  $32,748  Long-term Debt $35,280  $36,288  Net Fixed Assets $49,101   $47,802   Common Stock $22,400  $23,520  Total Assets $76,989  $80,550  Retained Earnings $6,675  $9,229  $76,989  $80,550  The Book Nook has a beta of 1.3.  The market risk premium is 6.75%.  The Book Nook’s WACC is 10.75%, a  Cost of Equity of 15.55%, and a dividend payout ratio of 70%.  The Book Nook will grow at the sustainable 
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Unformatted text preview: growth rate forever. The current market value of The Book Nook’s debt is 125% of par. 1. Using the sustainable growth rate model, what is the growth rate for The Book Nook that will be used for calculating the firm’s value? 2. Using the FCFF discounted cash flow formula, what is the Free Cash Flow to the Firm? 3. Using your answer for the FCFF from question 2 and the sustainable growth rate found in question 1, what is the firm value using the FCFF formula method of valuation? [Hint: Remember that the answer for question 2 is the FCFF so you need to use FCFF 1 in the numerator. To solve for FCFF 1 you use the formula: FCFF 1 = FCFF * (1+sustainable growth rate)]....
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