502: Corporate Finance Fall 2013 Suggested Solutions to Problem Set II Question 1 RWJJ Chapter 16 / Question 8 8. a. The earnings per share are: EPS = $37,500/5,000 shares EPS = $7.50 So, the cash flow for the shareholder is: Cash flow = $7.50(100 shares) Cash flow = $750 b. To determine the cash flow to the shareholder, we need to determine the EPS of the firm under the proposed capital structure. The market value of the firm is: V = $65(5,000) V = $325,000 Under the proposed capital structure
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fact is that old vessels accounts for a small percentage of the existing vessels and there won’t be a significant reduction in supply due to scraping of old vessels. 4. Show the Free cash flow from operating the new capsize vessel in the first five years. Please refer to the Table 1 below, which shows the free cash flows from operating the new capesize of US firm and HK firm in the first five years. Key Assumptions: 1) The Special Survey capital expenditures were depreciated on a
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Analysis and Valuation Spreadsheet Income Statement-66 This case starts with raw financial statements and then a) develops standardized financial statements, b) constructs a statement of cash flows, c) builds all the key ratios, d) links forecast inputs to future financial statements, and e) builds discounted cash flow and residual income valuation models based on the forecasts. The result is a simplified version of eVal4, the spreadsheet model that is provided with “Equity Valuation and Analysis” by
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investment opportunity arises for Wendy – the possibility of introducing a new dishwasher model with improved features. The following table presents some salient financial information that Wendy’s managers put together for her evaluation: |Incremental cash outlay for additional equipment |$1,500,000 | |Useful life |10 years | |Salvage value at the end of useful life
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analysis techniques. The first section of the test addresses discounted cash flow analysis. See how you would do by answering the following questions. a. Draw time lines for (a) a $100 lump sum cash flow at the end of year 2, (b) an ordinary annuity of $100 per year for 3 years, and (c) an uneven cash flow stream of -$50, $100, $75, and $50 at the end of years 0 through 3. Answer: (Begin by discussing basic discounted cash flow concepts, terminology, and solution methods.) A time line is
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The amount of property and equipment on the balance sheet for the two most recent years are (dollars in millions) $27,743 (2014) and $25,867 (2013). Depreciation expense is (dollars in millions) $4,187 (2014) and $3,959 (2013). Amounts on the cash flow statement for depreciation is $8,067 (2014). Expenditure incurred on purchase of property, plant and equipment is called capital expenditure. Such an expenditure is capitalized which means it is recorded on the balance sheet instead of writing it
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Ch 9 Test – Discounted Cash Flow Analysis • Capital budgeting uses cash flows not accounting profits. • To calculate the value of a capital budgeting project, use incremental cash flows, not total cash flows. • Know what items are considered in cash flow analysis for capital budgeting: ▪ incremental cash flows, ▪ indirect effects, ▪ opportunity costs, ▪ changes in net working capital, ▪ shutdown cash flows,) ▪ beaware of overhead costs. Forget sunk costs. • Know when sunk costs
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Perpetuity: NPV= C1r Growing Perpetuity: NPV=C1r-g Annuity: NPV= C1r-C1r(1+r)t=C1(1+r)t-1r(1+r)t Growing Annuity: NPV= C1r-g-C1(1+g)t(r-g)(1+r)t Equivalent Annual Cash Flows: EAC=NPV(1+r)t-1r(1+r)t Stock Values: Div Yield=DivPrice Div=Payout Ratio*EPS Payout Ratio=DivEPS g= Plowback Ratio*ROE r=DivPrice-g Valuing Stocks: Stage 1. Current Dividends Estimation Stage 2. Firm-Specific Growth Rate Stage 3. Firm Long Term Growth Rate Stage 4. Constant Growth Rate, usually the growth
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crises, $14.6 billion is a lot of money. This is the amount of cash flow that Hewlett-Packard’s (HP) operations generated in 2008, up from $9.6 billion in 2007, despite the recession. The ability to generate cash flow is the lifeblood of a company and the basis for its fundamental value. How did HP use this cash flow? HP invested for the future by making over $11 billion in acquisitions. Other companies also generated large cash flows from operations in 2008, but they used the money differently
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Finance 1. Three Questions: A. What Long-term asset should be invested? Capital Budgeting B. How to raise cash for capital expenditures? Capital Structure C. How to manage short-term cash flow? Net Working Capital 2. Capital Structure: Marketing Value of Firm = MV of Debt + MV of Equity 3. Finance perspect and Accountant perspect: Finance: Cash Flow ! Accountant: A/R means profit ! 4. Sole proprietorship, parternership and corporation | 5. The goal of financial
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