bkmsol_ch18

# Adjustment positive 3 million in calculating fcfe

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c. Free cash flow to equity (FCFE) is calculated as follows: FCFE = NI + NCC – FCINV – WCINV + Net Borrowing where NCC = non-cash charges FCINV = investment in fixed capital WCINV = investment in working capital Million \$ Explanation NI = \$30.16 From Exhibit 18B NCC = +\$67.17 \$71.17 (depreciation and amortization from Exhibit 18B) – \$4.00* (gain on sale from Note 2) FCINV = –\$68.00 \$75.00 (capital expenditures from Note 1) – \$7.00* (cash on sale from Note 2) WCINV = –\$24.00 –\$3.00 (increase in accounts receivable from Exhibit 18A + –\$20.00 (increase in inventory from Exhibit 18A) + –\$1.00 (decrease in accounts payable from Exhibit 18A) Net Borrowing = +(–\$5.00) –\$5.00 (decrease in long-term debt from Exhibit 18A) FCFE = \$0.33 *Supplemental Note 2 in Exhibit 18C affects both NCC and FCINV. 24. Rio National’s equity is relatively undervalued compared to the industry on a P/E-to- growth (PEG) basis. Rio National’s PEG ratio of 1.33 is below the industry PEG ratio of 1.66. The lower PEG ratio is attractive because it implies that the growth rate at Rio National is available at a relatively lower price than is the case for the industry. The PEG ratios for Rio National and the industry are calculated below: Rio National Current Price = \$25.00 Normalized Earnings per Share = \$1.71 Price-to-Earnings Ratio = \$25/\$1.71 = 14.62 Growth Rate (as a percentage) = 11 PEG Ratio = 14.62/11 = 1.33 Industry Price-to-Earnings Ratio = 19.90 Growth Rate (as a percentage) = 12 PEG Ratio = 19.90/12 = 1.66 18-15
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