B) Now assume that Global Product’s required cash is set at 3 percent of sales.
ID: 2720416 • Letter: B
Question
B) Now assume that Global Product’s required cash is set at 3 percent of sales. Any additional cash would be surplus cash. Re-estimate the dollar amount of equity valuation cash flow for 2014.
Work with the assumptions in Part B about Global Products required cash being 3 percent of sales. Calculate the present value of the Global Products venture at the end of 2013 if investors want an annual rate of return of 25 percent and cash flows are expected to grow at a perpetual 8 percent annual rate beginning in 2015.
Equity valuation Cash Flow Year 2013 Forecast 2014 50,000 200,000 450,000 700,000 300,000 1,000,000 Cash 60,000 290,000 570,000 920,000 380,000 1,300,000 Inventories Total current Asset Fixed assets, net Total Assets Account Payable Accurals Bank Loan 140,000 50,000 80,000 270,000 400,000 50,000 200,000 80,000 1,000,000 180,000 70,000 90,000 340,000 550,000 50,000 200,000 160,000 1,300,000 Total Current Liabilities Long-term Debt Common Stock ($1 par value) Capital Surplus Retained earnings Total Liabilities and equity 1,300,000 780,000 520,000 130,000 150,000 40,000 200,000 45,000 155,000 62,000 93,000 1,600,000 960,000 640,000 160,000 150,000 55,000 275,000 55,000 220,000 88,000 132,000 Net Sales Cogs Gross profit Marketing General and administrative Depreciation EBIT Interes EBT Income Taxes (40%) Net IncomeExplanation / Answer
Ans of part A: Equity Valuation Cas Flow: =
Net Income: $132,000+ Depreciation: $55,000 - Change in NOWC:[($60,000+$290,000+$570,000-$180,000-$70,000)-($50,000+$200,000+$450,000-$140,000-$50,000)]= $670,000- $510,000= $160,000 - change in gross fixed assets :($380,000-$300,000 + depreciation of $55,000) = $135,000+ Net Debt Issues: ($90,000+$550,000) - ($80,000+$400,000)= $640,000- $480,000 = $160,000
Equity Valuation Cash Flow= $132,000+$55,000+$160,000-$135,000+$160,000= $52,000
Ans of Part B:
Required Cash: 2013 = $1,300,000*.03= $39,000
Surplus Cash: $50,000-$39,000= $11,000
Required cash in 2015: $1,600,000*.03 = $48,000
Surplus Cash: $60,000-$48,000= $12,000
Change in NOWC(without surplus cash): [($48,000+$290,000+$570,000-$180,000-$70,000) - ($39,000 + $200,000+$450,000-$140,000-$50,000)]=$658,000-$499,000=$159,000
Equity valuation cash flow = $132,000+$55,000-$159,000-$135,000+$160,000=$53,000. The 2015 stripping of the additional $1000 of surples cash leads directly to a $ 1000 increase in the valuation cash flow.
Ans of Part C-
Present value @ 25% = $52,000/(0.25 - 0.08) = $305,882.35
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