Year Cash Flows Discount Rate 15%

1 100,000 TV Multiple 5
2 120,000 Borrowing 400,000
3 135,000
4 150,000 Part a
5 175,000 PV of planning 439,227
TV 875,000 PV of TV 435,030
Enterprise value 874,257

875000 Part b
* Equity value 474,257
$439,227.37
$435,029.64
 Pro Forma Income Statements (
#REF!
0 $ 100,000.00
Cost of goods sold -40,000.00
Gross profit $ 60,000.00
Operating expenses (excluding depreciation) -30,000.00
Depreciation expense -8,000.00
0 $ 22,000.00
Less: Interest expense -2,000.00
Earnings before taxes $ 20,000.00
Less: Taxes -6,000.00
Net income $ 14,000.00

Actual
0
Sales $ 100,000

0
Current Assets $ 15,000
Property, Plant & Equipment 40,000
Total $ 55,000
Accruals & Payables $ 5,000
Long-term debt 25,000
Equity 25,000
Total $ 55,000

Invested Capital $ 50,000

We use the equity account to make the balance sheet balance. The added equity is raised either
through the retention of earnings or sale of new common shares.
 Pro Forma Income Statements ($000)
#REF! #REF! #REF!
$ 100,000.00 $ 100,000.00 $ 100,000.00
-40,000.00 -40,000.00 -40,000.00
$ 60,000.00 $ 60,000.00 $ 60,000.00
-30,000.00 -30,000.00 -30,000.00
-8,000.00 -8,000.00 -8,000.00
$ 22,000.00 $ 22,000.00 $ 22,000.00
-2,000.00 -2,000.00 -2,000.00
$ 20,000.00 $ 20,000.00 $ 20,000.00
-6,000.00 -6,000.00 -6,000.00
$ 14,000.00 $ 14,000.00 $ 14,000.00

Projected Sales Revenues

1 2 3 4 5
$ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000

Proforma Balance Sheets ($000)

1 2 3 4 5
$ 15,000 $ 15,000 $ 15,000 $ 15,000 $ 15,000
40,000 40,000 40,000 40,000 40,000
$ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000
$ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000
25,000 25,000 25,000 25,000 25,000
25,000 25,000 25,000 25,000 25,000
$ 55,000 $ 55,000 $ 55,000 $ 55,000 $ 55,000

$ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000

ded equity is raised either

Part a
Rf 7%
Risk premium 5%
Kd 8%
Beta 1.6
Ke 15.00%

Part b 1 2 3 4
Op. Profit $ 22,000.00 $ 22,000.00 $ 22,000.00 $ 22,000.00
Less: tax 6,600.00 6,600.00 6,600.00 6,600.00 30%
NOPAT 15,400.00 15,400.00 15,400.00 15,400.00
Add: Depreciation 8,000.00 8,000.00 8,000.00 8,000.00
Less: CAPEX 8,000.00 8,000.00 8,000.00 8,000.00
Less: WC Changes $ - $ - $ - $ -
FCF to Firm 15,400.00 15,400.00 15,400.00 15,400.00
Less: Interest*(1-t) -1,400.00 -1,400.00 -1,400.00 -1,400.00
FCF to Equity 14,000.00 14,000.00 14,000.00 14,000.00
Terminal value (TV) 93,333.33

Equity Value
PV of planning $ 39,969.70
PV of TV $ 53,363.64
Equity value $ 93,333.33

Debt value
PV of interest ₹ 6,624.25
PV of Principal ₹ 18,375.75
Debt value ₹ 25,000.00

Enterprise value $ 118,333.33

Part c
Equity % 79%
Debt % 21%
Kd*(1-t) 5.6%
WACC 13.01%

Part d
same as part b

Part e
Hint: 118,333.33
Part f
Equity value $ 93,333.33
No. of shares 2000
Price per share $ 46.67
 PROBLEM 9-5

Given
Corporate tax rate 25%
Capex (2010-2014) equals depreciation expense
Cost of debt financing 10%
Required return on equity 20%
Targed debt to value ratio 10%
Terminal period growth rate in FCFs 5%

Base Year Forecast

Income Statement 2014 2015 2016 2017 2018
Sales $ 3,417,500.00 $ 3,700,625.00 $ 3,983,750.00 $ 4,266,875.00 $ 4,550,000.00
Depreciation 48,190.60 50,118.22 52,122.95 54,207.87
COGS 1,402,798.69 1,496,881.13 1,590,963.56 1,685,046.00
Other Operating Expenses 1,078,447.38 1,109,874.25 1,141,301.13 1,172,728.00
EBIT $ 1,171,188.34 $ 1,326,876.40 $ 1,482,487.36 $ 1,638,018.13
Interest 5,110.00 5,110.00 5,110.00 5,110.00
Earnings before Taxes $ 1,166,078.34 $ 1,321,766.40 $ 1,477,377.36 $ 1,632,908.13
Income Taxes -291,519.58 -330,441.60 -369,344.34 -408,227.03
Net Income $ 874,558.75 $ 991,324.80 $ 1,108,033.02 $ 1,224,681.10
Preferred Stock Dividends - - - -
Net Income to Common Stock 874,558.75 991,324.80 1,108,033.02 1,224,681.10
Common Stock Dividends 874,558.75 991,324.80 1,108,033.02 1,224,681.10
Income to Retained Earnings - - - -

Base Year Forecast

Balance Sheet 2014 2015 2016 2017 2018
Current Assets $ 170,630.00 $ 185,031.25 $ 199,187.50 $ 213,343.75 $ 227,500.00
Gross Fixed Assets 1,204,765.00 1,252,955.60 1,303,073.82 1,355,196.78 1,409,404.65
Accumulated Depreciation -734,750.00 -782,940.60 -833,058.82 -885,181.78 -939,389.65
Net Fixed Assets $ 470,015.00 $ 470,015.00 $ 470,015.00 $ 470,015.00 $ 470,015.00
Total Assets $ 640,645.00 $ 655,046.25 $ 669,202.50 $ 683,358.75 $ 697,515.00

Current Liabilities $ 129,645.00 $ 144,046.25 $ 158,202.50 $ 172,358.75 $ 186,515.00

L-T Debt 51,100.00 51,100.00 51,100.00 51,100.00 51,100.00
Preferred Stock - - - - -
Common Stock 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00
Retained Earnings 458,900.00 458,900.00 458,900.00 458,900.00 458,900.00
Total Common Equity $ 459,900.00 $ 459,900.00 $ 459,900.00 $ 459,900.00 $ 459,900.00
Total Liabilities & Equity $ 640,645.00 $ 655,046.25 $ 669,202.50 $ 683,358.75 $ 697,515.00
 Part a
Tax rate 25%
Ke 20%
Kd 10%
Debt/EV 10%
Equity/EV 90%

2015 2016 2017 2018 2019

EBIT $ 1,171,188.34 $ 1,326,876.40 $ 1,482,487.36 $ 1,638,018.13 $ 1,793,465.50
Less: Tax $ 292,797.08 $ 331,719.10 $ 370,621.84 $ 409,504.53 $ 448,366.38
NOPAT $ 878,391.25 $ 995,157.30 $ 1,111,865.52 $ 1,228,513.60 $ 1,345,099.13
2019 Add: Depreciation $ 48,190.60 $ 50,118.22 $ 52,122.95 $ 54,207.87 $ 56,376.19
$ 4,833,125.00 Less: CAPEX $ -48,190.60 $ -50,118.22 $ -52,122.95 $ -54,207.87 $ -56,376.19
56,376.19 Less: WC Changes $ - $ - $ - $ - $ -
1,779,128.44 FCF to firm $ 878,391.25 $ 995,157.30 $ 1,111,865.52 $ 1,228,513.60 $ 1,345,099.13
1,204,154.88
$ 1,793,465.50 Part b
5,860.00 Post tax Kd 7.5%
$ 1,787,605.50 WACC 18.75%
-446,901.38 Growth rate 5%
$ 1,340,704.13 Teminal Value TV $ 10,271,666.05 $ 10,271,666.05
- PV of TV $ 4,349,835.17 ₹4,349,835.17
1,340,704.13 PV of Planning $ 3,296,797.37 ₹3,296,797.37
1,340,704.13 Enterprise Value EV $ 7,646,632.53 $ 7,646,632.53
-

2019
$ 241,656.25
1,540,780.83
-995,765.83
$ 545,015.00
$ 786,671.25

$ 200,671.25
58,600.00
-
68,500.00
458,900.00
$ 527,400.00
$ 786,671.25