 # Finance Review Assignment

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Final Review

1. Free Cash Flow= EBIT (1-T) + depreciation – (cap ex.+change in nowc)

Sales=24,500

Operating costs=6,500

Depreciation=1,350

Bonds= 3,500 carrying 6.25% ir

Tax rate=40%

Net Operating Working Capital= 2,850

NOWC=CA-(CL-Notes Payable)

EBIT= sales-op costs- depreciation

24,500-6,500-1,350=16,650=EBIT

FCF=16,650(1-.4)+1,350-(2,850)

1. Average Tax Rate=Federal Tax Liability/ Taxable Income

Exemption 1=4,000

Standard Deduction=6,300

Salary=125,000

Taxable Income = Income- Exemptions and Deductions

Federal Tax Liability= [Income- Base (marginal rate)]+ tax rate

1. TVM-What you should pay for an annuity

*If Annuity Payment is at beginning of year make sure calc is in beg mode

Annuity payment at end of each year=54,300

Duration= 25 years

Other investment earnings=6%

N         I/Y        PV        PMT          FV

25        6%        ?        54,300          0

1. TVM-Pay after a set amount of periods and owe after payments

*If payments are monthly make sure you multiply by 12

*When are P1 and P2 different?

\$ Borrowed=35,000

Ir=8%

Payments=8 equal instalments at end of year

N        I/Y        PV        PMT        FV

8        8%        35,000        ?        0

PMT=-6,276.67

Use AMORT

P1=3

P2=3

INT=2,492.63

P1=5

P2=5

BAL=15,944.92

1. Bond

Price equation=solve for PV

*Annual Payment percent does not equal I/Y

*For PV subtract price for x year from total year

IE= If asking for a price 8 years from now subtract 8 from the total years (20-8)=12

N        I/Y        PV        PMT        FV

20        ?        -1025        65        1,000

=6.277

N        I/Y        PV        PMT        FV

12        6.277        ?        65        1000

1. Stock Example

Constant Growth Model=(1+Dividend growth)/(Required Return- Dividend growth)

Use CAPM for Req. Return

=Risk Free + Risk Premium x Beta

=3 + 6.5 x 1.3

*Equation for Market Risk Premium?

1+7%/(11.45%-7%)=CGM

Dividend= \$1.5

Dividend Growth= 7% constant

Beta=1.3

Market Risk premium= 6.5%

Risk Free Rate=3.00%

7.Stock (intrinsic value)

Free Cash Flow end of year 1=\$24.50 million

Free Cash Flow end of year 2=\$35 million

FCF growth=5.5% constant

WACC=9%

Long Term Debt=225 million

12 million shares of common stock outstanding

Draw timeline*

5.5% from here on

0                1                2                3

Horizon Value 2= FCF3/WACC(or discount rate)

FCF3 is chosen because it is the first year that growth became fully constant

Use cash flow function

CF0=0

C01=FCF1

CO2=FCF2+HV2

NPV

I=WACC

Value of Common Equity= NPV- (Value of Liability + Preferred Equity)

Stock Price = Value of Common Equity/# of shares outstanding

=59.58

8.WACC Example

WACC=wd rd(1-T)+wp rp + wc rs

-The firms noncalleable bonds mature in 25 years, have an 6.5% semi-annual coupon, a par value of 1000 and a market price of 1105 the firm has 800,000 bonds outstanding

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