Finance Homework Problems

Due Wednesday March 7, 2018

Please Clearly Mark Your Answers
Homework Counts 6 Points Towards Course Grade

All Work Must be shown to get credit for correct answers.

Question 1. Following is the five-year forecast for SKS Manufacturing. (Counts 4

Points)

$ millions

2019 2020 2021 2022 2023

EBIT 5500 5600 5800 6010 6030

Capital Expenditures 500 500 500 500 500

Changes in Working Capital 40 100 (20) (20) 10

Depreciation 50 60 100 120 130

Part A. Assuming a tax rate of 21%, calculate SKS projected free cash flow each year.

(counts 2 points)

2019 = 3,855.00

2020 = 3,884.00

2021 = 4,202.00

2022 = 4,387.90

2023 = 4,383.70

NPV of 2019 – 2023 Cash Flows (assume a 11% discount rate) = 15,189.74

Part B. Estimate the fair market value (NPV) of SKS today. Assume that after 2023,

EBIT will remain constant at $6030 million (no growth), depreciation will equal capital

expenditures each year, and working capital will not change. Assume cost of capital after

2023 will continue to be 11% (counts 2 points)

Answer: 40,889.92
 Finance Homework Problems
Due Wednesday March 7, 2018
Please Clearly Mark Your Answers
Homework Counts 6 Points Towards Course Grade

Question 2. Consider the following information. (Counts 3 Points)

U.S. 30 year t-bond yield = 2.9%

Market Risk Premium = 6.25%
Tax Rate = 21%
Moody’s Corporate Bond Rating for AT&T = Baa1 (assume 208 basis points)

Use Yahoo/Finance AT&T financial profile (see page near end of the assignment)

then answer the following questions.

Part A. Calculate the weighted cost of capital for AT&T (2 points)

Answer: 4.8939%

Part B. Calculate the MVA for AT&T(1 point)

Answer: 88.49 B
 Finance Homework Problems
Due Wednesday March 7, 2018
Please Clearly Mark Your Answers
Homework Counts 6 Points Towards Course Grade

Question 3. Jona sought to raise $8 million in private placement of equity in her early
stage Internet Company. She projected net income of $17 million in year 5 and knew that
comparable companies traded at a price range of 12 times earnings (i.e. multiple of 12).
She approached Mr. Razza of Alliance Capital about an investment. What share of the
company would Mr. Razza require today if his required rate of return (RRR) were 60%.
(Counts 1 Point)

Answer: 41.12%

Question 4. Jona is the sole owner of her company and has 1,500,000 shares of stock at a
.10/share par value. Continuing with Question 3, how many shares of stock will Mr.
Razza receive for his $8 million investment. (Counts 1 Point)

Answer: 1047554 shares

Question 5. Continuing with Question 3, Mr. Razza expects that a future round of
financing (likely in year 3) will be required to completely fund Jona’s Internet company
to exit. If he believes that to support this future round, an additional 15% of the company
will have to be sold, what is the value of the retention ratio that he will demand to ensure
that his ownership interests are not diluted. (Counts 1 Point)

Answer: 86.96%
 Finance Homework Problems
Due Wednesday March 7, 2018
Please Clearly Mark Your Answers
Homework Counts 6 Points Towards Course Grade
 Finance Homework Problems
Due Wednesday March 7, 2018
Please Clearly Mark Your Answers
Homework Counts 6 Points Towards Course Grade

Write Calculations Here (All Problems)

Answer 1. A
2019 2020 2021 2022 2023
EBIT 5500 5600 5800 6010 6030
Capital Expenditures 500 500 500 500 500
Changes in Working Capital 40 100 (20) (20) 10
Depreciation 50 60 100 120 130
Value** 3,855.00 3,884.00 4,202.00 4,387.90 4,383.70
Value/(1.11)^t 3472.97 3152.34 3072.46 2890.44 2601.51
NPV 15,189.74

**Value = (EBIT*(1-Tax %) - Capital Exp + Changes in Working Capital + Depreciation)

Answer 1. B
TF @ 2023 = 6030*(1-0.21)/0.11 = 43306.36
NPV of TF = 43306.36/(1.11)^5 = 25700.217
Hence, Fair Market Value = 25700.217 + 15189.74 = 40,889.94

Answer 2. A
D 165.67
E 229.23
D/(D+E) 0.41952
E/(D+E) 0.58048

WACC = (2.9 + 2.08)*(1-0.21)*0.41952 + (6.25*0.43+2.9)*(0.58048)

= 4.8939

Answer 2. B
Stock price per share 37.3531
-- Book value per share 22.94
* no. of shares outstanding 6.14 B
= (37.3531 - 22.94)*6.14
= 88.496434 B
 Finance Homework Problems
Due Wednesday March 7, 2018
Please Clearly Mark Your Answers
Homework Counts 6 Points Towards Course Grade

Write Calculations Here (All Problems)

Answer 3
Terminal value = (Net Income)*(1/EPS)= 17*12 = 204M
Discounted Terminal Value = TV/(1+RRR)^5 = 204/(1+0.60)^5= 19.46M
% ownership = 8/(204/(1+0.60)^5)= 41.12%

Answer 4
1500000/(1- 0.4112) -1500000 = 1047554.35 shares

Answer 5
Retention ratio = 1/(1+0.15)= 0.8696

End of Finance Homework Assignment