FIN 623 - Yu Feng 2/16/2018!

Question P5.3

a. APV Valuation Method

0.10
rUA
$3,000 0.10 10.00 $30,000.00
Vu=FCF/rUA

0.10
rITS = rUA
$0 0.10 10.00 $0.00
vITS = ITS/rUA
Value of Firm $30,000.00

b. Company’s Capital Structure Ratios

Year 0
Value of the Firm: VF = $30,000
Value of Debt: VD = $12,000
Value of Equity: VE = $10,000
Value of Debt to Value of the firm: VD/ VF = 40%
Value of Equity to Value of the firm: VE/ VF =33.3%
Value of Debt to Value of Equity: VD/ VE = 1.2

Given the structure of the company, the capital structure ratios should not vary too much
over time because the value and the financing of the company should be growing all
proportionally.

c. Weighted Average Cost of Capital

rE = rUA + (rUA -rD)*D/E + (rUA-rPS)*PS/E =0.1+ (0.1-0.08) * 1.2 + (0.1 - 0.09) * 0.8 = 13.2%
rWACC = rE * E/V + rD * D/V + rPS * PS/V = 13.2% * 33.3%+0.08*0.4+0.09*0.2667 = 0.10
d. Value of the firm with WACC method

VF = FCFU * rWACC-1 = $30,000

e. Value of the Equity with Equity DCF method

Equity Free Cash Flow (EFCF)
= Unlevered Free Cash Flow - Interest Paid in Cash - Preferred Stock Dividend
= $3,000 - $960 -$720 = $1,320
VE = EFCF/ rE = $1,320 / 13.2% = $10,000
FIN 623 - Yu Feng 2/16/2018!

Question P5.4

a. Value of the company using WACC Method

rE = rUA + (rUA -rD)*D/E+ (rUA-rPS)*PS/E = 0.11+(0.11-0.09)*1.25+(0.11 -0.1)*0.25 = 0.1375
rWACC = rE * E/V + (1-TINT) * rD * D/V+rPS*I =0.1375*0.4+(1-40%)*0.09*0.5+0.1*40% =9.2%
VF = FCFU /rWACC = $3,000 /9.2% = $32,608.70

b. Amount of debt and preferred stock

Debt = VF * 50% = $32,608.70 * 50% = $16,304.35
Preferred Stock = VF * 10% = $32,608.70 * 10% = $3,261.00

c. Value of the company with APV method

VF = FCF / rUA + ITS / rUA = $3,000 / 0.11 + $587/ 0.11 = $32,609

d. Equity Free Cash Flow (EFCF)

EFCF = Unlevered Free Cash Flow - Interest Paid in Cash + Interest Tax Shield -
Preferred Stock Dividend = $3,000 - $1,467 +$587 - $326 = $1,793

e. VE = EFCF/ rE = $1,793 / 0.1375 = $13,043

FIN 623 - Yu Feng 2/16/2018!

Question P6.1

a. PV of cash flow & Present Value weighted growth rate

Y0 Y1 Y2 Y3 Y4 Y5 CVFirm
$494

FCF $200 $240 $300 $420 $480 $7,063

DF 0.909 0.826 0.751 0.683 0.621 0.621

PV $182 198 $225 $287 $298 $4,385

Value of Firm as of 2011 = 182+198+225+287+289+4,385 = $5,576

Present Value Weighted Average Growth Rate =

ga = r - FCF1/VF0 = (10%- ($200/$5576)= 6.41%
b. PV of cash flows at the end of Year 0.
Y0 Y1 Y2 Y3 Y4 Y5 CVFirm TV
$466 $3,582

FCF $200 $240 $300 $420 $480 $7,063

DF 0.909 0.826 0.751 0.683 0.621 0.621

PV $182 198 $225 $287 $298 $2,224

Value of Firm = 182+198+225+287+289+2224= $3,414

ga = r - FCF1/VF0 = (10%- ($200/$3,414)= 4.14%
FIN 623 - Yu Feng 2/16/2018!

QUESTION P6.2

a. PV of cash flow & Present Value weighted growth rate

Y0 Y1 Y2 Y3 Y4 Y5 CVFirm
$5,150

FCF $2000 -$3000 $3000 $3,900 $5,000 $73,571

DF 0.909 0.826 0.751 0.683 0.621 0.621

PV $1818 -$2,479 $2,254 $2664 $3,105 $45,682

Value of Firm = 1818-2479+2254+2664+3105+45682 = $53,043
ga = r - FCF1/VF0 = (10%- ($2000/$53043)= 6.23%

b.
Y0 Y1 Y2 Y3 Y4 Y5 CVFirm
$4,850

FCF $2000 -$3000 $3000 $3,900 $5,000 $37,308

DF 0.909 0.826 0.751 0.683 0.621 0.621

PV $1818 -$2,479 $2,254 $2664 $3,105 $23,165

Value of Firm = 1818-2479+2254+2664+3105+23165 = $30,526
ga = r - FCF1/VF0 = (10%- ($2000/$30526)= 3.45%
FIN 623 - Yu Feng 2/16/2018!

QUESTION P6.3

a.
60% 20% 10% 5% 5% 3%

Y0 Y1 Y2 Y3 Y4 Y5 CVFirm
$554

FCF $231 $370 $444 $488 $512 $538 $7915

DF 0.909 0.826 0.751 0.683 0.621 0.621

PV $336 $367 $367 $350 $334 $4914

Value of Firm = 336+367+367+350+334+4914 = $6,667
ga = r - FCF1/VF0 = (10%- ($231/$6,667)=6.54%
b.
g0= (1+r)/1+ (FCF0/VF,0)+ 1 = 6.32%
FIN 623 - Yu Feng 2/16/2018!

QUESTION P6.4

Discount Rate = 9%
g2 AAer Year 10

-3% 0% 3%
g1(through Year N)
5% 1.4% 2.4% 3.8%

10% 3.3% 4.2% 5.2%

15% 4.8% 5.5% 6.3%

QUESTION P6.5

g1 = 10.50% - 2600/<(1+10.50%)^2 * (3000- 2000/(1+10.50%)^2+2400/(1+10.50%)^2> = 2.38%

g2 = 1.97%
g3 = 2.00%
g4 = 2.79%
g5 = 0.90%

QUESTION P6.6

FCF1 = $187
FCF2 = $707
FCF3 = -$773
FCF4 = $1,227
Value of Firm as of Year 0 = $3,940
FIN 623 - Yu Feng 2/16/2018!

QUESTION P7.1

Year 0 Year 1 Year 2

Income Statement
Revenue $2,420 $0
Expenses -$1,500 $0
Earnings $920 $0

Balance Sheet
Cash $0 $0 $0
Receivable $0 $2,420 $0
Inventory (T-Shirts) $1,500 $0 $0
Total Assets $1,500 $2,420 $0

Common Stock $1,500 $1,500 $1,500

Retained Earn $0 $920 -$1,500
Total Equities $1,500 $2,420 $0
Discount Rate = 10%

a. Cash Flow ValuaRon Model

rWACC = rUA = 10%

0 Year 1 Year 2 CV2

FCF $0 $2,420 $0
DF 0.091 0.826 0.826
PV of CF $0.00 $2,000.00 $0
Discounted Value = 0+2000+0= $2,000
FIN 623 - Yu Feng 2/16/2018!

b. Excess Cash Flow ValuaRon Model

Year 1 Year 2 CV2

Investment $1,500 $1,500
Required Rate of Return 10% 10%
Required Cash Flow $150 $150

Free Cash Flow $2,420

Required cash Flow $150 $150 $1,500
Excess Cash Flow -$150 $2,270 -$1,500

DF 0.9091 0.8264 0.8264

-$136.36 $1,876.03 -$1,239.67
Total PV = -$136,36 +$1876.03-$1239.67 = $500
Discount Value = PV + Investment = 500 + 1500 = $2,000

c. Excess Earnings ValuaRon Model

Year 1 Year 2
Investment (Beginning Balance) $1,500 $2,420
Required Rate of Return 10% 10%
Required Cash Flow $150 $242

Cash Flow $920 $0

Required Cash Flow $150 $242
Excess Cash Flow $770 -$242

DF 90.91% 82.64%
$700 -$200
Total Present Value = 700-200 = $500
Discounted Value = PV + Investment = 500 + 1500 = $2,000
FIN 623 - Yu Feng 2/16/2018!

QUESTION P7.2

Year 0 Year 1 Year 2

Income Statement
Revenue $2,420 $0
Amortization of -$100 -$100
Intangible
Expenses -$1,500 $0
Earnings $820 -$100

Cash 0 0 0
Receivable 0 $2,420 0
Inventory $1,500 $0.00 $0.00
Intangible Assets $200 $0.00 $0.00
Total Assets $1,700 $2,420.00 $0.00

Common Stock $1,700 $1,700 $1,700

Retained Earn 0 $820 -$1,700
Total Equities $1,700 $2,520 0

a. Discounted Cash Flow ValuaRon

0 Year 1 Year 2 CV2
FCF $0 $2,420 $0
DF 0.091 0.826 0.826
PV of CF $0 $2000 $0
Discounted Value = 0+2000+0= $2,000

Discount Value = PV + Investment = 500 + 1500 = $2,000

FIN 623 - Yu Feng 2/16/2018!

b. Excess Cash Flow ValuaRon

Year 1 Year 2 CV2
Investment $1,700 $1,500
Required Rate of Return 10% 10%
Required Cash Flow $170 $150

Free Cash Flow 0 $2,420 0

Required cash Flow $150 $170 $1,700
Excess Cash Flow -$150 $2,250 -$1,700

DF 0.9091 0.8264 0.8264

-$155 $1,860 -$1,405
Present Value = -155+1860-1405 = $300
Discount Value = PV + Investment = 300 + 1700 = $2,000

c. Excess Earnings ValuaRon Model

Year 1 Year 2
Total Assets (Beginning Balance) $1,700 $2,520
Required Rate of Return 10% 10%
Required Cash Flow $170 $252

Cash Flow $920 -$100

Required Cash Flow $170 $252
Excess Cash Flow $650 -$352

DF 90.91% 82.64%
$591 -$291
Total Present Value = 591-291 = 300
Discounted Value = PV + Investment = 300 + 1700 = $2,000
FIN 623 - Yu Feng 2/16/2018!

QUESTION P7.3
Year 0 Year 1 Year 2 Year 3 Year 4

Unlevered Net income in Year

Net Income $2,708 $3,006 $3,048 $3,222

+Interest (Amount paid in forecasts) $1,500 $1,440 $1,320 $1,190

-Interest Tax Shield (in forecast) -$600 -$576 -$528 $476

Unlevered Net income in Year $3,608 $3,870 $3,840 $3,936

Beginning of Year Invested Capital

Common Stock $3,187 $5,781 $7,463 $9,464

Debt $15,000 $14,400 $13,200 $11,900

Total Invested Capital $18,187 $20,181 $20,483 $21,364

Unlevered Cost of Capotal for Year 0.12 0.12 0.12 0.12

Required Unlevered Net Income for Year $2,182 $2,422 $2,501 $2,564

Excess Unlevered Earning for Year $1,426 $1,449 $1,339 $1,372

FIN 623 - Yu Feng 2/16/2018!

APV Valuation - Excess Earning Year 0 Year 1 Year 2 Year 3 CVFirm

Excess Earning for Continuing $1,372
Value
DF for Continuing Value $10.53

Excess Earning and Continuing $1,426 $1,449 $1,339 $14,444

DF 0.89 0.80 0.71 0.71

Present Value $1,273 $1,155 $953 $10,281

Present Value for Excess Earning $13,661

Book Value of Firm $18,187

Unlevered Value of the Firm $31,848

Value of the ITS

ITS for Continuing Value $476

DF for Continuing Value 10.53

ITS and Continuing Value

Value of the ITS $600 $576 $528 $5,011

DF 0.89 0.80 0.71 0.71

Present Value $536 $459 $376 $3,566

Value of the ITS $4,937

Value of the Firm $36,785

b.

As of the End of the Yr Year 0 Year 1 Year 2 Year 3

VF $37,785 $38,986 $39,880 $40,818

D $15,000 $14,400 $13,200 $11,900

E $21,785 $24,586 $26,680 $28,918

D to VF 0.4078 0.3694 0.3310 0.2915

E to VF 0.5922 0.6306 0.6690 0.7085
D to E 0.6885 0.5857 0.4948 0.4115
FIN 623 - Yu Feng 2/16/2018!

Beg of Yr 1 Beg of Yr 2 Beg of Yr 3 Beg of Yr 4

0.12 0.12 0.12 0.12

rU
0.1 0.1 0.1 0.1
rD
Debt to Common Equity 0.69 0.59 0.49 0.41

0.1338 0.1317 0.1299 0.1282

rE

Beg of Yr 1 Beg of Yr 2 Beg of Yr 3 Beg of Yr 4

0.1338 0.1317 0.1299 0.1282

rE
Equity to Firm Value 0.5922 0.6306 0.6690 0.7085
0.10 0.10 0.10 0.10
rD
Debt to Firm Value 0.4078 0.3694 0.3310 0.2915
Income Tax Rate 0.40 0.40 0.40 0.40
0.1037 0.1052 0.1068 0.1083
rWACC

Germunder and Company Equity Excess Earnings ValuaRon

Year 0 Year 1 Year 2 Year 3 Year 4

Net Income to Common Equity for Year $2,708 $3,006 $3,048 $3,222

Total Common Equity at beg of Year $3,187 $5,781 $7,643 $9,464

Common Equity Cost of Capital 0.1338 0.1317 0.1299 0.1282

Required Net Income to Common Equity $426 $761 $993 $1,214

Excess Earning to Common Equity $2,282 $2,245 $2,055 $2,008

Year 0 Year 1 Year 2 Year 3 CVEquity

Excess Earning for Continuing Value $2,008

DF for Continuing Value 9.687

Excess Earning and Continuing $2,282 $2,245 $2,055 $19,454

Value
DF 0.882 0.779 0.690 0.690

PV $2,013 $1,750 $1,417 $13,419

PV for Excess Earning $18,589

Book Value of Equity $3,187

Value of Equity $21,785