Problem 5 Current After year 5 EBIT 1 t 10 Invested Capi 100 Wrong growth rate

Problem 5 current after year 5 ebit 1 t 10 invested

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Problem 5 Current After year 5 EBIT (1-t) 10 Invested Capi 100 ! Wrong growth rate: -1 point Net Cap Ex 7 ! FCFF not consistent with growth: -1 point Change in wo 2 Return on cap 10% 10% Reinvestment 90% 30% ! Did not compute reinvestment rate in year 6: -1 point Expected grow 9% 3% ! Wrong discount rate on termnal value: -0.5 point Cost of capita 12% 8% Year 1 2 3 4 5 Terminal year EBIT (1-t)  $10.90 $11.88 $12.95 $14.12 $15.39 $15.85  - Reinvestme $9.81 $10.69 $11.66 $12.70 $13.85 $4.75 FCFF $1.09 $1.19 $1.30 $1.41 $1.54 $11.09 Terminal value $221.87 ! Discounted terminal value at wrong discount rate: -0.5 point Present value $0.97 $0.95 $0.92 $0.90 $126.77 ! Subtracted cash (instead of adding it): -0.5 point Value of opera $130.51  + Cash $15.00  - Debt $40.00 Value of equit $105.51 / Number of sh $8.00 Value per sha $13.19
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Problem 1 a.  Market value of equity = 800 1. Did not capitalize leases: -1 point Market value of interest bearing de 400 2. Used after-tax cost of debt to capitalize leases: - 0.5 point PV of lease commitments = 406.0553654 ! PV of $ 80 million @5% 3. Unlevered and relevered beta for leases (why?): 0.5 point 4. Did not after-tax cost of debt: - 0.5 point Debt ratio = 50.19% Beta = 1.15 Cost of equity = 9.25% Cost of debt (after-tax) 3.00% Cost of capital = 6.11% b. Value of entertainment = 963.6332192 Value of electronics = 642.4221462 1. Did not compute unlevered beta: -1 point Current unlevered beta = 0.716715637 ! 1.15/(1+(1-.4)(806/800)) 2. Did not back out unelvered beta of entertainment business: -1 point Unlevered beta = 0.7167 = 0.90 (.4) + X (.6) 3. Did not estimate new D/E ratio correctly: -1 point Solving for new unlevered beta 4. Did not adjust cost of debt: -0.5 point Unlevered beta after divestiture = 0.594526061 5. Did not after-tax cost of debt: -0.5 point Debt after transaction = 645.4498288 ! 806 - 0.25*642.42 Equity after transaction = 318.1833904 ! 800 - 0.75*642.42 D/E ratio after transaction = 2.028546581 Levered beta after transaction = 1.318140347 Cost of equity = 10.09% After-tax cost of debt = 3.90% Cost of capital = 5.94% Problem 2 Initial investment = 60 1. Ignored working capital initial investment: -0.5 point Initial investment in WC = 10 2. Errors on computing annual after-tax cash flow: -1 point  3. Did not salvage working capital or show tax benefit from not salvaging: -0.5 point 0 Yrs 1-10 Year 10 4. Did not salvage initial investment: -0.5 point Initial investment -70 5. Used company's cost of capital : -1 point Salvage 20 Revenues 100 EBITDA 15 ! If you choose not to salvage working capital, you have to show the tax benefit  - Depreciation 5 you will get in year 10 because you will be writing off the investment. That EBIT 10 tax benefit will be 0.4(10) = 4 EBIT (1-t) 6  + Depreciaton 5 Cash flow 11 NPV =  9.042450851 b. If project continues in perpetuity Initial investment -70 Forever ! Note that if the project is to continue forever, the cap ex = depreciaation. Otherwise, you  Terminal value will deplete your assets' earning power and not be able to go on forever.
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