EBIT 1 t 3000 4120 5305 6556 6753 Deprecn 2000 2000 2000 2000 Cap Ex 1500 1500

Ebit 1 t 3000 4120 5305 6556 6753 deprecn 2000 2000

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EBIT (1-t) $30.00 $41.20 $53.05 $65.56 $67.53 + Deprecn $20.00 $20.00 $20.00 $20.00 - Cap Ex $15.00 $15.00 $15.00 $15.00 $20.26 FCFF $35.00 $46.20 $58.05 $70.56 $47.27 PV (@12%) $41.25 $46.27 $50.23 b. Terminal value = 47.27/(.10-.03) = $675.31 PV of terminal value = $480.67 ! Discount back at 12% c. Value today = $618.42 + Cash $25.00 - Debt = $150.00 Value of equity = $493.42 Value per share = $49.34 Problem 2 After-tax operating margin for Springbok = 0.15 Expected EV/Sales = 0.25 + 0.10 (15) = 1.75 Value of Springbok = 175 b. Expected growth in revenues, since this is a firm value regression c. Value attached by the private equity investor to 33.33% equity = 40 Value attached to all of the equity = 120 Value attached to the firm = 150 d. Value of the firm in the 3 years = 211.75 Value of the outstanding debt = 50 Value of equity = 161.75 Annual return = (182.925/120)^(1/3)-1 = 10.46% Problem 3 Value of the firm today = 100 ! Gave full credit even if you Value of firm = 15*(1-.03/ROC)*1.03/(.09-.03) ! Computed return on capital Solving for the ROC Return on capital = 4.85% b. Value of firm at optimal debt ratio with return on capital = cost of capital Reinvestment rate = 0.375 ! Interesting variations possib Value of firm = 193.125 I did give full credit if you sub - Debt = 25 The two inputs are incompat Value of equity = 168.125 Value per share = $11.21 c. Value per non-voting share = $5.00 Value per voting share = $8.73 ! 5 + (168.125-75)/5…. I am Problem 4 a. EV/BV ratio for Ludmilla = (.12-.04)/(.08-.04) = 2 Book value of Ludmilla = 500 PV of depreciation tax benefits on existing book value = 134.201628 New book value for Ludmilla = 1250
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PV of depreciation tax benefits on new book value = 335.5040699 Value of synergy = 201.302442 b. If Lybov pays $1,250 million for Ludmilla, it has overpaid by about $49 million Its value will decrease by $49 million New value of Lybov = 1451.302442 ! Add synergy and subtract premium - Debt 250 ! Subtract out debt Value of equity = $12.01 Problem 5 a. PV of cashflows over next 20 years = 926.8677818 NPV of project = -273.132218 b. S = 926.8677818 K = 1200 t = 10 r = 4% Std devn = 31.43% Cost of delay 0.043156101 ! The loss of exclusivity seems to cost $40 million in after-tax cashflows Value of the rights to this project = $177 million
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! Common errors 1. The margin changes each year, not the operating income (-0.5 to -1) 2. The net cap ex is a cash inflow, not an outflow (-0.5 to -1) 1. Used year 3 cashflow instead of computing new reinvestment rate (-1) 2. Used wrong cost of capital (12% instead of 10%) (-1) ! Discount terminal value back at 12%, not 10% (-0.5 to -1) 2. Add back cash, not subtract (-0.5) 3. Subtract out debt (-0.5) ! Mechanical errors (-0.5) ! -1 for any other answer ! 1. Added debt to 1/3 value (-0.5) 2. Mechanical errors (-0.5) ! Year 1 is 100 million… I did give full credit if you pushed it out and extra year. The return would hav ! Forgot to subtract out debt (-1) Did not compute annual return (-0.5 to -1) forgot the (1.03) l using market value of firm (-1.5 to -2) ble btracted out new debt of 40%… and used 15 million shares. tible since moving to a 40% debt ratio will reduce the number of shares outstanding. assuming that voting stockholders get the entire value of control in this case… ! If you use (1+g) in the equation, your book value is slightly smaller (483 million) Common errors
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1. Depreciated market value of old firm rather than book value (-2) 2. Computed tax savings using (1-t) instead of t (-1) 3. Mistakes in present value calcualtion (-1/2 to -1) ! The change in stock price should reflect the difference between what was paid and what you get as The stock price prior to the change was $12.50…. The new stock price you compute should reflect th ! Used only first 10 years of cashflows (why?) Used 20 years instead of 10 years each year
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ve been 15.1%.
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s synergy benefits he fact that they overpaid….
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