1. Joe Ford, CFA, is analyzing the financial statements of Stings Delicatessen.

He has a 2011 income statement and balance sheet, as well as 2012 income statement and balance sheet forecasts. Assume there will be no sales of long-term assets in 2011. Calculate forecasted free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) for 2011.
Stings Income Statement
Income Statement 2012 Forecast Sales Cost of goods sold Gross profit SG&A Depreciation EBIT Interest expense Pre-tax earnings Taxes (at 30%) Net income $300 120 180 35 50 95 15 80 24 $56 2011 Actual $250 100 150 30 40 80 10 70 21 $49

Stings Balance Sheet

Balance Sheet 2012 Forecast Cash Accounts receivable Inventory Current assets Gross property, plant, and equipment Accumulated depreciation Total assets $10 30 40 $80 400 (190) $290 2011 Actual $5 15 30 $50 300 (140) $210

Accounts payable Short-term debt

$20 20 $40

$20 10 $30

Long-term debt Common stock Retained earnings Total liabilities and owners equity

114 50 86 $290

100 50 30 $210

2. Knappa Valley Winerys (KVW) most recent FCFF is $5,000,000. KVW s target debtto-equity ratio is 0.25. The market value of the firms debt is $10,000,000, and KVW has 2,000,000 shares of common stock outstanding. The firms tax rate is 40%, the shareholders require a return of 16% on their investment, the firms before-tax cost of debt is 8%, and the expected long-term growth rate in FCFF is 5%. Calculate the value of the firm and the value per share of the equity. 3. Ridgeway Construction has an FCFE of 2.50 Canadian dollars (C$) per share and is currently operating at a target debt-to-equity ratio of 0.4. The expected return on the market is 9%, the risk free rate is 4%, and Ridgeway has a beta of 1.5. The expected growth rate of FCFE is 4.5%. Calculate the value of Ridgeway stock. 4. The Prentice Paint Company earned a net profit margin of 20% on revenues of $20 million this year. Fixed capital investment was $2 million, and depreciation was $3 million. Working capital investment equals 7.5% of the sales level in that year. Net income, fixed capital investment, depreciation, interest expense, and sales are expected to grow at 10% per year for the next five years. After five years, the growth in sales, net income, depreciation and interest expense will decline to a stable 5% per year, and fixed capital investment and depreciation will offset each other. The tax rate is 40%, and Prentice has 1 million shares of common stock outstanding and long-term debt paying 12.5% interest trading at its par value of $32 million. Calculate the value of the firm and its equity using the FCFF model if the WACC is 17% during the high growth stage and 15% during the stable stage.