Final-F22-exam

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University of Colorado, Boulder *

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FNCE 3010

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Finance

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Feb 20, 2024

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docx

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Uploaded by BrigadierRain12845

Final Exam MBAC 6060 Fall 2022 Answer the (five) questions (1), (2) etc . All necessary information can be derived from what is provided. Step one is to download the data file from the canvas page. Do your calculations in excel and submit the excel file via the course’s canvas page as your solution. Be sure to label your entries and make it clear what each value represents; I will count as incorrect anything that I cannot easily identify. Assume interest rates are given as an APR with annual compounding and that personal taxes are not a consideration. It’s a quiet day in early January of 2023 , maybe too quiet. You have been instructed by your boss, Ralph, to complete a series of exercises to aid in planning. Ralph’s Bar, a disreputable drinking establishment on the island of Eleuthera, is a privately held firm. The first exercise you must complete is to (1) create annual pro forma income statements and balance sheets for the year ends 2023, 2024, and 2025 . You are asked to use the cash account and/or the revolving line of credit account (short-term debt) as plug accounts in these forecasts. Ralph’s had sales of $350 million in 2022 . Sales are forecast to grow at a rate of 8% per year over the next 3 years and subsequently sales are expected to grow at a constant rate of 2.0% for the foreseeable future (i.e., in 2026 and beyond). Based on its historical performance, Ralph expects that for each year, end of year COGS to be 56.0% of that year’s total sales and each year’s Operating Expenses (excluding depreciation) are similarly expected to be 29.2% of sales in that year. Your forecast of Interest expense for each year t is to be based on the end of year t-1 balances of short- and long-term debt. At the end of 2022 Net PP&E was $240 million and the $20 million per year of existing depreciation (depreciation in 2022 for the existing assets) is scheduled to continue beyond the forecast period. To meet the projected growth in sales new capital expenditures in the amount of $60 million are planned for 2023 and an additional $60 million in 2025 . Assume that, for tax purposes, these new assets will be depreciated on a straight-line basis for 10 years beginning in the year they are acquired . So that the firm will be prepared for the coming year, Ralph’s requires a minimum of 10 days sales in Cash ** on hand at the end of every year. Their usual accounts receivable collection period ** equals 30 days sales while their accounts payables period ** usually equals 55 days of cost of goods sold. Ralph’s “production processes and sales efforts” requires that they keep 45 days of cost of goods sold in inventory ** at all times. Ralph’s currently has long-term debt on its balance sheet. For purposes of developing your forecast, you are asked to assume this is held constant. There is also currently short- term debt on your balance sheet in the form of a revolving line of credit. Given Ralph’s current book value total debt to equity ratio of almost 14% and his target market value net debt to equity ratio of 15%, the firm’s debt is seen as being risk free . Ralph’s faces a corporate tax rate of 21% and US tax and accounting rules apply. Ralph’s has 10 million shares of equity held by Ralph’s friends and family and currently pays no dividends.

Based on the pro forma accounting statements you are to develop, you are also instructed to (2) forecast future free cash flow over the forecast horizon (’23, ‘24’, ’25) and for 2026 as the first year of the terminal period for purposes of a valuation . Ralph requests that you (3) estimate the company’s cost of unlevered equity capital and its WACC and he has asked his ne’er do well nephew to gather information concerning the financial market and local publicly traded firms and this is provided below. (4) Estimate the company’s current levered enterprise value . Finally, (5) what is the value of the tax savings due to debt financing at target leverage included in your answer to question (4)? **Control ratios defined: Days Sales in Cash year t: (required cash) Collection Period year t: Payables Period year t: Inventory days year t: Comparable Firms Market Value Debt to Equity Ratio Equity Beta Debt Beta Rico’s Yard Care 0.5 1.60 0.10 Ed’s Bar 0.3 1.20 0.04 Heather’s Auto Parts 1.2 2.70 0.20 Henry’s Bar 0.8 1.60 0.09 Financial Market Data Treasury Bills, 1-year maturity, on January 3 rd 2023 3.50% Treasury Bonds, 20-year maturity, on January 3 rd 2023 3.50% Average 1-year Treasury Bill return 1950 – 2022 3.30% Average 20-year Treasury Bond return 1950 – 2022 5.30% Return on S&P 500 for 2022 (including dividend yield) 23.10% Return on S&P 500 for 2022 (excluding dividend yield) 19.60% Average return on S&P 500 1950 – 2022 (including dividend yield) 11.30% Average return on S&P 500 1950 – 2022 (excluding dividend yield) 8.90%

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