ESCINV Sample Valuation [PDF]

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Problems (p. 503) 12-1 AFN Equation Baxter Video Products’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals. The after tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70%. Use the AFN equation to forecast Baxter’s additional funds needed for the coming year.



AFN = Required Increase in Assets – Spontaneous Increase – Addition to Retained AFN = ((Assets/10’ sales) * (11’ sales–10’ sales)) – ((10’ SA/10’ sales) * (11’ sales–10’ sales)) – (1+g) * 10’ sales * M * (1-POR) AFN = (($3M/$5M) * ($6M-$5M)) – (($500k/$5M) * ($6M-$5M)) - ((1 + 0.20) * $5M) * 0.05 * (1 - 0.70) AFN = (0.60 * $1M) – (0.10 * $1M) – ((1.20 * $5M) * 0.05 * 0.30) AFN = $600,000 – $100,000 – ($6M * 0.05 * 0.30) AFN = $600,000 – $100,000 – $90,000 AFN = $410,000



Problems (pp. 549-550) 13-2 Value of Operations of Constant Growth Firm EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value of operations.



V = FCF0 (1 + g) / (WACC – g) V = $400,000 (1 + 0.05) / (0.12 – 0.05) V = ($400,000 * 1.05) / 0.07 V = $420,000 / 0.07 V = $6,000,000



13-3 Horizon Value Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2012, and the weighted average cost of capital is 11%. What is the horizon (continuing) value at 2012?



Free cash flow (millions of dollars)



Actual 2010 $606.82



g = FCF2013 / FCF2012 g = $750.00 / $707.55 g = 0.06 HV = FCF2012(1 + g) / (WACC – g) HV = $707.55(1 + 0.06) / (0.11 – 0.06) HV = $750 / 0.05 HV = $15,000



Projected 2011 $667.50



2012 $707.55



2013 $750.00



13-4 EROIC and MVA of Constant Growth Firm A company has capital of $200 million. It has an EROIC of 9%, forecasted constant growth of 5%, and a WACC of 10%. What is its value of operations? What is its intrinsic MVA? (Hint: Use Equation 13-5.) V = $160,000,000, MVA = -$40,000,000