Review the financial statements below 2016 Income Statement Sales 2,000 COGS 1,5
ID: 2818637 • Letter: R
Question
Review the financial statements below
2016 Income Statement
Sales
2,000
COGS
1,500
EBIT
500
Interest expense
20
Taxable income
480
Taxes
192
Net Income
288
2016 Balance Sheet
Cash
100
Accounts payable
150
Accounts receivable
70
Total current liabilities
150
Inventory
130
Total current assets
300
Long-term debt
250
Common stock
100
Fixed assets
700
Retained earnings
500
Total stockholders equity
600
Total
1000
Total
1000
2017 Statement of Cash Flows
Operating activities:
Net Income
288
Depreciation
70
Change in accounts receivable
30
Change in inventory
(60)
Change in accounts payable
20
Cash flow from operating activities
348
Investing activities:
Capital expenditures
(250)
Cash flow from investing activities
(250)
Financing activities
Repayment of borrowing
(18)
Cash flow from financing activities
(18)
2016 Income Statement
Sales
2,000
COGS
1,500
EBIT
500
Interest expense
20
Taxable income
480
Taxes
192
Net Income
288
Explanation / Answer
Free cash flow is the amount of cash flow from operations available for distribution after considering all non-cash expenses, taxes, working capital and long term fixed assets costs are paid.
Free cash flow (FCFF) can bve calculated from various ways. One of the formula of calculating FCFF is as follows
FCFF = cash flow from operation + interest*(1- tax rate) - capital expenditure
Tax rate = Tax / Taxable income
Tax = 192
Taxable income = 480
Therefore, tax rate = 192/480 = 40%
Interest = 20
Capital Expenditure = 250
Cash flow from operating activities (CFO) = 348
So FCFF = CFO + + interest*(1- tax rate) - capital expenditure
Putting all the values in equation we will get,
FCFF = 348 + 20*(1-0.4) - 250 = 110
FCFF will grow at 4% for every year i.e. growth is constant therefore, to value the firm we will use the Gordan growth model
As per this model, Value of a firm growing at constant rate = FCFF*(1+g)/r-g)
where FCFF is Free cash flow, g is growth rate and r is cost of capital
g = 4% and r = 14%
So value of firm = 110*(1+0.04)/(0.14-0.04) = 1144
1.) Enterprise value is the firm's total value which is 1144
2.) Firms stock price = Value of equity / number of shares outstanding
number of shares outstanding = 100
Value of equity = Value of firm - long term debt + cash and equivalents
Long term debt = 250
Cash = 100
Therefore, value of equity = 1144 - 250 +100 = 994
Stock price = 994/100 = 9.94
If 100 shares are outstanding then stock price of firm = 9.94
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