Used cash flow in year 3 to growt at 4 1 poi c d Did not use 10 as discount

! Used cash flow in year 3 to growt at 4%: -1 poi c. & d. ! Did not use 10% as discount rate: -0.5 point FCFF $108.00 $116.64 $4,492.97 Cost of capital 12% 11% 10% Cumulated WACC 1.12 1.2432 1.36752 ! Discount at cumulated WACC Present value $96.43 $93.82 $3,285.49 Value of firm $3,475.74 + Cash 400 - Debt 1000 I also gave full credit if you used the treasury stock approach. - Minority interest 500 ! 250 * 2 Add exercise value of $ 400 million (20*20 to numerator) Value of equity $2,375.74 and divide by 100 million shares Value of options 200 Value of equity in common stock $2,175.74 Value per shaer $27.20

Net effect on value = -$50.00 ! Sold for less than these stores are worth Effect on value/share = -$0.63 ! Value per share will decrease Fall 2009 Problem 1 1 2 3 Terminal year EBIT -$100.00 $100.00 $150.00 154.5 ! Ignored NOL: -1 point Taxes $0.00 $0.00 $40.00 61.8 ! Failed to accumulate losses: -0.5 points EBIT (1-t) -$100.00 $100.00 $110.00 92.7 ! Did not compute FCFF: -1 point Reinvestment $100.00 $150.00 $50.00 23.175 FCFF -$200.00 -$50.00 $60.00 69.525 Terminal value $993.21 Cumulated Cost of capital 1.1500 1.2880 1.4168 ! Did not cumulate discount rates: -1 point PV -$173.91 -$38.82 $743.38 NOL $150.00 $50.00 $0.00 Capital invested $572.50 $722.50 $772.50 ! Did not compute ROC in year 3: -1 point ! Errors on reinvestment rate: -1 point Return on capital in terminal year = 12.00% ! Errors on terminal value computation: -0.5 to -1 point Reinvestment in terminal year = 25.00% Value of operating assets = $530.64 + Cash $80.00 ! Did not add cash: -1 point + Value of cross holding $100.00 40*2.5 ! Did not compute minority holding value: -1 point - Expected lawsuit liability $25.00 ! .25*100 ! Did not subtract out lawsuit liability: -1 point Value of equity $685.64 Value of equity = $685.64 ! Any mistake: -1 point + Exercise proceeds $60.00 / Number of diluted shares 110 Value per share today = $6.78 Fall 2010 Year 1 Year 2 Year 3 Revenues $150 $160 $180 EBIT (1-t) -$15 $15 $25

+ Depreciation $15 $20 $25 - Cap EX $5 $25 $40 FCFF -$5 $10 $10 Grading notes Cost of capital 14% 12% 10% a. PV of cash flows for first 3 years = Cumulated Cost of capital 1.1400 1.2768 1.4045 ! Discount at ! Did not cumulate: -1 point Cash Flow -$5 $10 $10 ! In year 3: 1 Math errors: -0.5 point each Present Value -$4.39 $7.83 $7.12 Total $10.57 b. Return on capital invested EBIT (1-t) -$15 $15 $25 ! Capital inve ! All or nothing…. Sorry Capital invested: end of year $180 $185 $200 Capital invested in year n + (Cap ex - Depreciation) ROC -8.33% 8.11% 12.50% g/ROC will not work, since ROC is changing c. Terminal value Return on capital = 12.50% ! Did not compute reinvestment rate: -1 point Expected growth rate = 3% ! Math errors: -0.5 point each Reinvestment Rate = 20.0% Terminal Value 273.333333 ! 25*1.025* (1-0.2)/(.10-.025) c. PV of terminal value = 194.615326 ! Discount back at cumulated cost ! Used book value of debt: -0.5 point Sum of FCFF next 3 years $10.57 ! Did not discount terminal value: -0.5 point Value of opeating assets = $205.18 + Cash 25 - Debt 75 ! Cannot use book value ina DCF valuation Value of equity = $155.18 Value per share= $7.76 Problem 2 FCFE value of equity ! Did not compute FCFE value = - 1 point FCFE = 120 ! Already next year's number ! Did not set up probability of nationalization: -1 point Cost of equity = 10% ! Other math errors: -0.5 point each