EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
17th Edition
ISBN: 9781260464900
Author: BLOCK
Publisher: MCGRAW-HILL LEARNING SOLN.(CC)
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Textbook Question
Chapter 2, Problem 22P
Nova Electrics anticipates cash flow from operating activities of
a. What is the firm’s projected
b. What does the concept of free cash flow represent?
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YES
NO
Only need answers for parts d) and e). Please include calculations.
XYZ company has the following expected cash flows for three scenarios that could occur:
Recession Expected Expansion
(prob. = .2) (prob. = .5) (prob. =.3)
EBIT $10,000 $20,000 $30,000
MV Assets ______
(a) Complete the table above if the company is 100% equity financed, it pays taxes at 30%, the non-levered return on equity is expected to be 12%, the constant growth rate (g) is 5%, and overall firm value is calculated based on the expected after-tax cash flows
(b) If the company wants to recapitalize (debt for equity swap) to save on taxes, what is the most debt the company can add (at a 6% rate) so that it will never go bankrupt under the above scenarios? (Assume the company goes bankrupt if EBIT < Interest owed)
(c) Calculate the WACC for the unlevered case and for the…
Kale Inc. forecasts the free cash flows (in millions) shown below. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, then what is the firm’s total corporate value (in millions)? Do not round intermediate calculations.
Year
1
2
Free Cash flow
-$50
$115
a. $1,295
b. $1,682
c. $1,833
d. $1,530
e. $1,446
Chapter 2 Solutions
EBK FOUNDATIONS OF FINANCIAL MANAGEMENT
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