Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
|
Year
|
0
|
1
|
2
|
3
|
|
Sales (Revenues)
|
|
100,000
|
100,000
|
100,000
|
|
- Cost of Goods Sold (50% of Sales)
|
|
50,000
|
50,000
|
50,000
|
|
- Depreciation
|
|
30,000
|
30,000
|
30,000
|
|
= EBIT
|
|
20,000
|
20,000
|
20,000
|
|
- Taxes (35%)
|
|
7000
|
7000
|
7000
|
|
= unlevered net income
|
|
13,000
|
13,000
|
13,000
|
|
+ Depreciation
|
|
30,000
|
30,000
|
30,000
|
|
- capital expenditures
|
-90,000
|
|
|
|
The free cash flow for the first year of Epiphany's project is closest to:
a. $43,000
b. $25,000
c. $13,000
d. $45,000
Problems:
Use the following information to answer the question(s) below.
|
Company
|
Ticker
|
Price
per Share
|
Earnings
per Share
|
Book Value
per Share
|
|
Abbott Labs
|
ABT
|
54.35
|
3.69
|
13.79
|
|
Bristol-Myers-Squibb
|
BMY
|
25.45
|
1.93
|
7.33
|
|
GlaxoSmithKline
|
GSK
|
41.3
|
3.15
|
6.03
|
|
Johnson & Johnson
|
JNJ
|
62.6
|
4.58
|
18.27
|
|
Merck
|
MRK
|
36.25
|
3.81
|
10.86
|
|
Pfizer
|
PFE
|
$18.30
|
$1.20
|
8.19
|
1. Assuming that Novartis AG (NVS) has an EPS of $3.35, what is the highest expected stock price for Novartis, based upon the P/E ratios for its competitors?
Problems:
1. What is an efficient portfolio?
2. Explain why the risk premium of a stock does not depend on its diversifiable risk.