Ch. 10 Problems Essay

805 Words Jul 16th, 2013 4 Pages
Ch. 10 Problems

1. In the year just ended, the Madison Badger Memorabilia Company, Inc., had sales of $465,000. It expects sales to grow by 10% in the coming year, by 8% the next year, and by 6% per year perpetually after that. The company has neither capital expenditures nor depreciation. There is no working capital requirement. EBIT is 20% of sales, and the company’s tax rate is 30%. MBMCI has $90,000 in cash, and $60,000 in debt. It has 20,000 shares of common stock outstanding, and has a weighted average cost of capital of 11%. Estimate the price of a share of MBMCI stock today.

2. Husker Heaven, Inc., will have free cash flow this coming year of $2,300,000. Its weighted average cost of capital is 13% and you expect
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WCC has a weighted average cost of capital of 12%, $50 million in cash, $60 million in debt, and has 18 million shares of common stock outstanding. What is the price of one share of White Chocolate Co. common stock at the beginning of year 1?

5. On one particular day, McDonald’s has a stock price of $86.71 and an EPS of $5.31. Its competitor, YUM Brands, has an EPS of $3.40. What would be the expected price of YUM Brands stock on that day if the price is estimated using the P/E method of comparables?

Answers

1. Year 0 1 2 3 Sales $511,500 $552,420 $585,565 Growth (from prior yr) 10% 8% 6% EBIT (20% sales) 102,300 110,484 117,113 Less: tax (30%) 30,690 33,145 35,134 FCF 71,610 77,339 81,979

Constant growth starts at beginning of year 3 V(end of yr 2) = 81979/(.11-.06) = $1,639,583
To calculate V0, take the PV of all FCF’s CF1 71,610 CF2 (77,339 + 1,639,583) NPV I =11% V0 = $1,458,005

P0 = 1,458,005 + 90,000 – 60,000 = $74.40 20,000 shr

2. V0 = Mkt value equity + debt – cash = 59.8 x 750,000 + 1,400,000 – 1,000,000 = 44,850,000 + 1,400,000 – 1,000,000 = $45,250,000 = FCF1/(WACC – g) 45,250,000 = 2,300,000/(.13 – g) Solve for g g = 7.92% so the 7% growth rate is too low.

3. Solve for the NPV of the FCF’s CF0 = 0 CF1 = -1,000,000 F1 = 2 CF2 = 3,000,000 F2 = 6 NPV I

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