Final Review
- 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)
- 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
- 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
- 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
- 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
- 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