Question 1: A financial analyst forecasts the financial statements of Jim & Brothers, Inc., a small grocery store. The three-year forecast of items in the financial statements are in the table below. Based on the forecast information, calculate the free cash flow for years 1 through 3. The tax rate is 40%.
|
|
|
$ millons |
|
| Year |
0 |
1 |
2 |
3 |
| Sales |
$100.00 |
$110.00 |
$117.70 |
$121.23 |
| Cost of goods sold |
$65.00 |
$71.50 |
$76.51 |
$78.80 |
| Selling, general and administrative expenses |
$15.00 |
$16.50 |
$17.66 |
$18.18 |
| Depreciation |
$10.00 |
$11.00 |
$11.77 |
$12.12 |
| Interest payment on debt |
$2.00 |
$2.50 |
$3.00 |
$3.50 |
| Capital expenditure |
$5.00 |
$5.50 |
$5.89 |
$6.06 |
| Current assets |
$10.00 |
$11.00 |
$11.77 |
$12.12 |
| Current liabilities |
$8.00 |
$8.80 |
$9.42 |
$9.70 |
|
|
|
|
|
| FREE CASH FLOW |
|
|
|
|
Question 2: The top three members of the management team of an electronic firm purchased the company with their own personal fund and $100 million borrowing. The interest on the loan was 11% and the loan is to be paid off annually by $25 million so that by the end of year 4 the loan will be fully paid off. The unlevered cost of equity for the firm is estimated at 12% and the tax rate is 35%. The free cash flows are estimated for the next four years as follows: $50 million in year 1, $55 million in year 2, $58 million in year 3, and $60 million in year 4. The cash flow is expected to grow at 3% per year after the fourth year. Estimate the value of the firm as of year 0 using the APV valuation method.
Question 3:
(A) Estimate the WACC for Kim's GV Dry Cleaner, Inc. with the following information:
Total value of equity: $1.5 milion;
Value of debt: $1 million;
Cost of debt: 10%;
10-year Treasury bond yield: 4%;
Market risk premium: 6%;
Beta for the levered equity: 1.2;
Tax rate: 40%
(B) One year later, the firm lowered the debt ratio to 20% (D/V=20%) and the cost of debt increased to 12%. Assuming everything else remained the same, estimate the new WACC.