EBK FINANCIAL MANAGEMENT: THEORY & PRAC
15th Edition
ISBN: 9781305886902
Author: EHRHARDT
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 12, Problem 3P
Summary Introduction
To determine: Additional funds needed and the reason why it is different from the previous problem.
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Question 3: Study the following financial statements.
What was NOWC for 2017 and 2018? Show the calculation and circle your answer. Assume that all
cash is excess cash; i.e., this cash is not needed for operating purposes.
Calculate the Free Cash Flow in 2018. Show the calculation and circle your answer.
What was 2018 EVA? Show the calculation and circle your answer. Assume that its after-tax cost of
capital is 10%.
What was MVA at the year-end 2018? Show the calculation and circle your answer. (Note: Share
Price is $25)
(Ignore income taxes in this problem.) Your Company is considering an investment that has the following data:
Year
1
2
3.
4.
Investment
$20,000
Cash inflow
$2,000
$2,000
$5,000
$4,000
$60,000
In what year does the payback period for this investment occur?
O Year 2.
O Year 3.
Year 4.
Year 5.
Please answer Question 3 and Question 6.
What would happen to net income and cash flow if depreciation were increased by $1.30 million?
What would be the impact on cash flow if depreciation was $1.30 million and interest expense was $2.30 million?
Chapter 12 Solutions
EBK FINANCIAL MANAGEMENT: THEORY & PRAC
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- AFN Equation Refer to Problem 9-1. Return to the assumption that the company had 5 million in assets at the end of 2018, but now assume that the company pays no dividends. Under these assumptions, what would be the additional funds needed for the coming year? Why is this AFN different from the one you found in Problem 9-1?arrow_forwardAFN EQUATION Refer to Problem 16-1 and assume that the company had 3 million in assets at the end of 2019. However, now assume that the company pays no dividends. Under these assumptions, what additional funds would be needed for the coming year? Why is this AFN different from the one you found in Problem 16-1?arrow_forwardAFN EQUATION Refer to Problem 16-1. What additional funds would be needed if the companys year-end 2019 assets had been 4 million? Assume that all other numbers are the same. Why is this AFN different from the one you found in Problem 16-1? Is the companys capital intensity the same or different? Explain.arrow_forward
- b. What effect would a $10.2 million capital expense have on this year's earnings if the capital is depreciated at a rate of $2.04 million per year for five years? What effect would it have on next year's earnings? (Select all the choices that apply.) A. Capital expenses do not affect earnings directly. However, the depreciation of $2.04 million would appear each year as a capital expense. B. Capital expenses do not affect earnings directly. However, the depreciation of $2.04 million would appear each year as an operating expense. C. With a reduction in taxes of 25% × $2.04 million = $0.51 million, earnings would be lower by $2.04 million - $0.51 million = $1.53 million for each of the next 5 years. D. With an increase in taxes of 25% × $2.04 million = $0.51 million, earnings would be higher by $2.04 million - $0.51 million = $1.53 million for each of the next 5 years.arrow_forwardDavid Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.arrow_forwardAFN Equation Refer to Problem 9-1. What would be the additional funds needed if the companys year-end 2018 assets had been 7 million? Assume that all other numbers, including sales, are the same as in Problem 9-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 9-1? Is the companys capital intensity ratio the same or different?arrow_forward
- 5.1 Calculate the Payback Period (expressed in years, months and days). 5.2 Calculate the Accounting Rate of Return on average investment (expressed to two decimal places). 5.3 Identify TWO (2) reasons why the company should not use the accounting rate of return to evaluate capital investments. 5.4 Calculate the Net Present Value. 5.5 Calculate the Internal Rate of Return (expressed to two decimal places) if the net cash flows are R320 000 per year for five years. Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. INFORMATION Purchase price R1 000 000 Expected useful life 5 years Scrap value 0 Minimum required rate of return 15% Expected net cash inflows: Year 1 R250 000 Year 2 R260 000 Year 3 R300 000 Year 4 R400 000 Year 5 R380 000 Expected net profit: Year 1 R50 000 Year 2 R60 000 Year 3 R100 000 Year 4 R200 000 Year 5 R180 000arrow_forwardYou will apply the concepts of company valuation that you have just learned to determine whether company XYZ is overvalued. We are currently at the end of the year "t". You performed a thorough financial analysis of XYZ and forecast the following Free Cash Flows (FCF): Year t+1: 352 million USDYear t+2: 385 million USDYear t+3: 407 million USDFrom year t+3 onward, you expect the FCFs to grow at a constant yearly rate of 4%. Through your analysis, you also determined that the appropriate Weighted Average Cost of Capital (WACC) for XYZ was 11%. Finally, you know that XYZ has 1000 million USD in debt and 100 million shares outstanding.arrow_forwardJefferson City Computers has developed a forecasting model to determine the additional funds it needs in the upcoming year. All else being equal, which of the following factors is likely to increase its additional funds needed (AFN)? A sharp increase in its forecasted sales and the company's fixed assets are at full capacity. A reduction in its dividend payout ratio. The company reduces its reliance on trade credit that sharply reduces, its accounts payable. Statements a and b are correct. Statements a and c are correct.arrow_forward
- DAS Co. is preparing its financial forecast for next year and its AFN is negative. This means that Select one: O a. the predicted change in total assets must be negative. O b. sales growth must be negative. O c. the dividend payout ratio must be greater than the predicted growth rate in sales. O d. the predicted change in spontaneous liabilities must be greater than the predicted change in total assets.arrow_forward1. How much long-term debt will the company have to issue next year? 2. If the operations are not in full capacity, what will be your answer? Note that what is asked for is the AFN if the operation is not in full capacity. Since the capacity % used is not given, exclude the fixed asset in the computation of AFN, use the current asset balance onlyarrow_forwardREQUIRED Study the information given below and answer the following questions: 1. Calculate the Payback Period (expressed in years, months and days). 2. Calculate the Accounting Rate of Return on average investment (expressed to two decimal places). 3. Identify TWO (2) reasons why Umdloti Limited should not use the accounting rate of return to evaluate capital investments. 4. Calculate the Net Present Value. 5. Calculate the Internal Rate of Return (expressed to two decimal places) if the net cash flows are R320 000 per year for five years. Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation.arrow_forward
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