Benefits Of Selling And Administration Expenses

1092 WordsJan 15, 20155 Pages
COGS and selling and administration expenses will keep same percentage of revenue as FY 2014, which is approximately 79.4% and 16.1%. Depreciation and amortization expense and interest expense will be calculated respectively in Depreciation schedule and Debt schedule (Appendix 5 and Appendix 6). Tax rate in last five year are slightly different. So assume the 2014 tax rate 32.9% is the new run rate. Kroger keep its CAPEX at almost stable percent of revenue. Assume CAPEX of next five years maintain the same percent of revenue of most recent year as 2.4%. Based on the Form 10-K of most recent year, assume the dividends per share will keep the growth rate of 8%. Assume treasury stock purchase equal to current stock price times the…show more content…
It equals: FCFF = EBIT (1- Tax Rate) + Depreciation - Capital expenditures - Increase in Net working capital. In this case, Kroger’s unlevered free cash flow in next five projected years are respectively 1424.2, 1438.0, 1479.7, 1526.9, and 1578.7 million (Appendix 8). Second, the weighted average cost of capital is calculated by the formula: WACC = Cost of Debt * (Debt value/Total value) * (1 – Tax Rate) + Cost of Equity * (Equity Value/Total Value). In this case, Cost of debt for Kroger is generated by using the weighted average interested rate of Kroger’s long-term debt (Table 9). Cost of debt = 4.5%. Cost of Equity is calculated by using CAPM method. Risk-free rate, market premium and beta used in this case is 2.95%, 5.0% and 0.7. Cost of Equity = 6.45%, and WACC = 5.52% (Appendix 7). The total net present value of net five year’s free cash flow is calculated as 6339.0 million. Table 9: Long-term of Kroger February 1, 2014 Expected Year of Maturity 2014 2015 2016 2017 2018 Thereafter Total Fair Value (in millions) Debt Fixed rate $ (309 ) $ (515 ) $ (764 ) $ (708 ) $ (1,003 ) $ (5,556 ) $ (8,855 ) $ (9,623 ) Average interest rate 4.75 % 4.75 % 4.92 % 5.09 % 5.12 % 5.30 % Variable rate $ (1,307 ) $ (9 ) $ (503 ) $ — $ — $ (106 ) $ (1,925 ) $ (1,924 ) Average interest rate 0.87 % 1.16 % 1.83 % 1.63 % 1.95 % 2.41 %  Terminal Value That
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