! Used cash flow in year 3 to growt at 4%: -
c. & d.
! Did not use 10% as discount rate: -0.5 po
FCFF
$108.00
$116.64
$4,492.97
Cost of capital
12%
11%
10%
! Discounted a
Cumulated WACC
1.12
1.2432
1.36752
! Discount at cumulated WACC
! Mistake on m
Present value
$96.43
$93.82
$3,285.49
! Other errors:
Value of firm
$3,475.74
+ Cash
400
- Debt
1000
I also gave full credit if you used the treasury stock approach.
! Used weird c
- Minority interest
500
! 250 * 2
Add exercise value of $ 400 million (20*20 to numerator)
approaches: -0
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
e.
False. (The cash wll be discounted only if investstor expect the firm to waste the cash.
! ALL OR NOTH
This firm has a return on captial > Cost of captial. I would expect investors to trust the
management of this firm.
f.
EBIT (1-t) of diversted stores =
$30.00
Cost of capital =
10%
! Estimated a
Value of stores =
$300.00
! With no growth, we can assume EBIT (1-t) = FCFF
! Did not net o
Divestiture proceeds =
250

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
273.3333333
! 25*1.025* (1-0.2)/(.10-.025)
c. PV of terminal value =
194.6153262
! 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

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- Spring '11
- RichardM.Levine
- Valuation, INVESTed CAPITAL, Value of Non-cash Assets