Student

3. Compute the unlevered free cash flow and the interest tax shields from 2008 to 2012 based on estimates provided in Exhibit 1 and Exhibit 6. (3 points)

The NPV compares the inflow of cash against the flow of cash to make the investment. With the cash flows occurring over a period of time, NPV also takes into account the cost of capital. The cost of capital or discount rate allows the company to weigh the present value of capital today with the investment capital’s present value. Futronics Inc. investment would have an NPV of $138,642.39. The NPV of this investment would add value to Futronics Inc.’ worth.

Our estimated cost of capital, 20.81%, is lower than Ricketts’ expected return, 30%-50%, thus the investment is worthy. However, it’s higher than other pessimistic members’ expected return, 10%-15%, making the decision more complex and requiring further valuation。

15. What is the Present Value (NPV) to Sterling of the base investment using FCF for 2013-2033?

- Merlo, Inc. maintains a debt-equity ratio of 0.25 and follows a residual dividend policy. The company has after-tax earnings of $3,800 for the year and needs $3,200 for new investments. What is the total amount Merlo will pay out in dividends this year?If debt = 0.25 and equity = 1, then debt + equity = 1.25. Equity portion of new investments = $3,200 × (1 / 1.25) = $2,560.00

Shareholder’s equity would be lower than that shown in 1982 ($318,000) because the company has to pay off interest and principal for many loans. There will be little money left for shareholder’s equity.

In the first step we analyze the data and calculate the free cash flow from the inception of the project to the foreseeable future.

We do not use the floatation cost here, since retained earnings are internally generated and not to be raised.

The next step was to calculate the free cash flows for the eleven-year period. In order to do so, we used to following formula: FCF = EBIT(1-tax) + depreciation - change in NWC – CapEx. From here, we used to WACC of 13.89% previously calculated, in order to find the present value of each FCF.

* Compute the value with leverage, VL, by discounting the free cash flows of the investment using the WACC.

FCF is calculated as:EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital ExpenditureIt can also be

Our WACC is almost constantly these years – around 5.50% -- via from 5.04% to 5.82%. We also use the scenario analysis for how the WACC and growth rate affect enterprise value and equity value.

* Refer sheet “25000 Sales” for cost incurred and Gain/loss for AIFS for different scenarios and actual sales volume of 25000.

Net investment (I) is defined as the change in the capital stock, K, and can be represented by ΔK such that

Net investment (I) is defined as the change in the capital stock, K, and can be represented by ΔK such that