Question Details

(solution) Can you help with exercise #2. Don't need help with the rest....


Can you help with exercise #2. Don't need help with the rest....
SYRACUSE UNIVERSITY

 

MARTIN J. WHITMAN SCHOOL OF MANAGEMENT

 

Investments Professor David Weinbaum

 

Problem Set 2 This is an optional problem set. The solutions are posted on Blackboard but you should

 

not look at them until you have had a chance to work on the problems. While you are

 

not expected to hand anything in, solving the problems will help you keep up with the

 

material. Also, the questions on the problem sets are representative of the kinds of

 

questions that will be asked in the tests.

 

Exercise 1

 

You have been asked to value a firm with expected annual after-tax cash flows, before

 

debt payments, of $100 million a year in perpetuity (FCFF). The firm has a cost of equity

 

of 10%, a market value of equity of $750 million and a market value of debt of $500

 

million (this is also the book value). The debt is perpetual and the after-tax interest rate

 

on debt is 5%. The company has no non-operating activities.

 

a. Estimate the value of the firm and the value of the equity based upon this value (i.e.,

 

do an FCFF valuation of the equity).

 

b. Estimate the value of equity, by discounting the cash flows to equity at the cost of

 

equity (i.e., do an FCFE valuation of the equity).

 

c. Now assume that you had been told that the market value of equity was $850 million

 

and that all of the other information remained unchanged. Answer parts a and b, using

 

these new values.

 

d. In practice, what needs to happen for the two valuation approaches (FCFF and FCFE)

 

to give the same estimate of the value of the equity? (Hint: Valuations are circular!) 1 Exercise 2

 

a. Using the financial statements and other information that you have for MPR, and

 

assuming a 5% perpetual growth rate in the FCFE, value the equity using the FCFE

 

method.

 

HINT: The valuation we did in class used the FCFF approach. Here you are asked to use

 

the FCFE approach. The first step is to compute the FCFE for the most recent year. Since

 

we computed the FCFF in class (23.96334), use the formula that links FCFF and FCFE

 

(from page 6 of handout II. B., FCFE + net paym?t debt principal + AT interest = FCFF + AT

 

non-operating income).

 

b. Does this value equal the estimated value using the FCFF method (which we

 

computed in class)? Why or why not?

 

Exercise 3

 

Below are the balance sheet and income statement of Levco Corp. Assume that the

 

entire cash balance is operating.

 

Balance Sheet ($ millions)

 

ASSETS 2006 Cash $ 2007

 

240 $ 300 Accounts receivable 200 220 Inventory 350 330 790 850 Gross PPE 600 750 Accumulated depreciation 125 150 475 600 1,265 1450 Total current assets Net PPE

 

Total assets

 

Liabilities and Shareholders' Equity

 

Accounts payable $ 2006

 

$ 2007

 

70 Short-term debt $ 65 175 195 5 10 250 270 Long-term debt 405 500 Common stock 210 240 Retained earnings 400 440 610 680 1,265 1450 Accrued expenses

 

Total current liabilities Total common equity

 

Total Liab. & O E $ 2 Income Statement ($ millions)

 

2007

 

Sales $ Cost of goods sold 3250

 

1950 Selling & admin. expense 900 Depreciation 25 Operating profit 375 Interest expense 35 Earnings before taxes 340 Taxes @ 40% 136 Net income 204 a. Compute the 2007 FCFF for Levco Corp using the top down approach, from the above

 

balance sheet and income statement.

 

b. Compute the 2007 FCFF for Levco Corp using the bottom up approach, from the above

 

balance sheet and income statement. 3

 


Solution details:

Pay using PayPal (No PayPal account Required) or your credit card . All your purchases are securely protected by .
SiteLock

About this Question

STATUS

Answered

QUALITY

Approved

DATE ANSWERED

Sep 13, 2020

EXPERT

Tutor

ANSWER RATING

GET INSTANT HELP/h4>

We have top-notch tutors who can do your essay/homework for you at a reasonable cost and then you can simply use that essay as a template to build your own arguments.

You can also use these solutions:

  • As a reference for in-depth understanding of the subject.
  • As a source of ideas / reasoning for your own research (if properly referenced)
  • For editing and paraphrasing (check your institution's definition of plagiarism and recommended paraphrase).
This we believe is a better way of understanding a problem and makes use of the efficiency of time of the student.

NEW ASSIGNMENT HELP?

Order New Solution. Quick Turnaround

Click on the button below in order to Order for a New, Original and High-Quality Essay Solutions. New orders are original solutions and precise to your writing instruction requirements. Place a New Order using the button below.

WE GUARANTEE, THAT YOUR PAPER WILL BE WRITTEN FROM SCRATCH AND WITHIN A DEADLINE.

Order Now