PHILIP MORRIS

Given that the total profit over 8 years is $1.2375B (or $155M per year for 8 years), we will now compute the Present Value of this amount using the following formula:

WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)

Based on estimated Debt to Value ratios and cost of debt estimates, WACC is estimated to be around 9%.

With a 35% tax, the alternative of selling of the vessel with a predicted total lifetime of 25 years, yields a slightly higher NPV compared to scraping after 15 years of use. The increase in NPV due to selling is because of a higher cash flow in the beginning of 2018 when the sale of the vessel occurs.

Once we obtained the UFCF, the terminal value was calculated in three different ways, treating the pipeline as an asset on our books, finding the value of project if cash flows are received for perpetuity an finding the annuity value of cash flows for 30 years by assuming that after 1992 cash

3. Project the incremental cash flows associated with the acquisition of the Collinsville plant without the laminate technology and estimate the acquisition’s net present value. (25 points)

WACC = [(46.8 x 8.83) + (30.30 x 5.50 x ( 1 - .40)) = 5.13%

Secondly, Ibbotson and Capital IQ provide their bond rating, capital structure, average historical long term risk free rate and beta. The reason I use historical risk free rate rather current rate is that it is more stable. According to above information I can find the cost of debt and cost of equity. Moreover, the effective tax rate can be found in their annual report. That is, I calculate the WACC finally.

We also calculated the terminal value estimates of Arcadian using a P/E multiples. The expected P/E multiples were provided (15-20) that result from the investment from Sierra Capital, we calculated the PV of the terminal values by using a WACC of 20%. In calculating the terminal value, our team used the last year in the forecast with a 5% nominal rate and discounted it back to present day along with all the other forecasted FCFs. Using P/E multiples, we estimated the terminal value by multiplying the net income for Arcadian in 2014, by 15 and 20 (Exhibit 1). Next, we calculated the total present value with the terminal value plus the negative PV free cash flow. Finally, the equity amount proposed to sell was calculated by 60% of total present value.

The questions have been attempted as follows and the same analogy has been taken to excel for rest of the part of the question:

The horizon value, as computed for fiscal year 2020 and beyond, was computed using a multiples approach. This approach applied an EV/EBITDA multiple of 5 to arrive at a terminal value of $31,965.79, or 72% of the enterprise value. We believe this assumption to be an appropriate proxy of LUV’s horizon value due to the lack of transparency in growth assumptions beyond 2020. In addition, this value was ascertained through the use of a liquidation approach. This approach assumes that the firm will cease operations at a point in time in the future and sell all assets. In doing so we arrived at a terminal value of $34,157.40; which is relatively in line with the EV/EBITDA multiple that was applied above.

Calculate the terminal value of the tax shield given the following information. Assume we are calculating it for the next year. The tax rate is 30%. Debt will be $1458 million. Assume debt grows at the same annual rate as the firm which is 7 %. The cost of debt is 4% while the cost of equity is 12%.

Terminal value is calculated by divided the synergies of one year to the weighted average cost of capital.

The present value for the cash flows is found as per the WACC (9.26%) to arrive at the enterprise value.

Marlboro, the leading cigarette brand for Philip Morris, was the dominant player in the premium priced market. While RJR was the second largest player in the market, RJR’s cigarette brands were fragmented. At the end of 1992, Marlboro had 24.4% unit market share, while each of the RJR brand cigarettes had less than 7% market share. Philip Morris, at 53% operating contribution margin, was significantly more profitable than RJR, at 34% operating contribution margin.