2009 2010 Sales ($ millions) 1000 1112 Cost of Goods Sold ($ millions) 500 556 O
ID: 2768583 • Letter: 2
Question
2009
2010
Sales ($ millions)
1000
1112
Cost of Goods Sold ($ millions)
500
556
Other Expenses ($ millions)
100
111
Depreciation ($ millions)
100
100
Interest Expense ($ millions)
50
55
Total Current Assets ($ millions)
600
700
Net Fixed Assets ($ millions)
1800
2000
Total Current Liabilities ($ millions)
450
550
Long-term Liabilities ($ millions)
900
975
The firm’s plowback ratio is .6
The firm’s tax rate is 40%
The company has 30 million shares outstanding. The current stock price is $35.
The company has two bond issues outstanding. The first issue is 100,000 bonds that have YTM of 5%, coupon rate of 7%, face value of $1000, and mature in 7 years. The second issue is 500,000 bonds with YTM of 8%, face value of $1500, and mature in 13 years. These bonds are currently selling for $1200.
The expected return on the market is 11%. The risk-free rate is 4%.
ABC’s beta is 2.15
ABC has the opportunity is pursue a new product. Estimates for demand of this product are 30,000 units annually for the first 5 years and 20,000 units annually for the following 6 years. Beyond that, the product is considered to be obsolete and production will cease. Price and variable costs would be $100 and $65, respectively. Fixed costs would be $225,000 per year. If they take this option, they must buy additional equipment for a total of $2 million. This equipment will be depreciated straight-line over a 15 year period of time. When the project is ended (in 11 years), it is expected they will be able to sell the equipment for $130,000. This option also requires an initial net working capital investment of $400,000. This initial NWC investment can be reduced to $300,000 when sales drop (i.e. from year 5 to year 6). The net working capital will be fully recouped at the end of the project. This project is riskier than the average project for the company. Management has determined that the appropriate discount rate to use will be the company WACC + 3% to account for the additional risk.
1. Find the firm's Cash Flow to Shareholders. Round your answer to the nearest dollar.
2009
2010
Sales ($ millions)
1000
1112
Cost of Goods Sold ($ millions)
500
556
Other Expenses ($ millions)
100
111
Depreciation ($ millions)
100
100
Interest Expense ($ millions)
50
55
Total Current Assets ($ millions)
600
700
Net Fixed Assets ($ millions)
1800
2000
Total Current Liabilities ($ millions)
450
550
Long-term Liabilities ($ millions)
900
975
Explanation / Answer
Calculated as: FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment
FCFE = 174-(2000-1800) -(150-150)+(975-900)
= 174-200+75
= 249-200 =$49
2009 2010 Sales 1000 1112 COGS 500 556 Other expenses 100 111 Depreciation 100 100 Interest expenses 50 55 PBT 250 290 Tax 100 116 PAT 150 174 Plow back ratio 0.6 0.6 Dividend ratio 0.4 0.4 Dividend 60 69.6Related Questions
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