Posted: June 1st, 2015

calculations

Show all work/calculations in most simplest for no excel please

Web-surfing exercise: Find a fast-growth publicly traded firm with financial statements posted on the firm’s Web page. Relate that firm’s financial statements to those of the examples in this chapter.
343
344
Formulate the process by which you would project that firm’s financial statements into the future in order to conduct a valuation.
2. Using a free stock quoting and research site on the Web (e.g., http://www.bloomberg.com or http://money.cnn.com), examine the current price for an Internet company. Relate the financial data you can find on the firm to the current stock price.

Chapter 9: Exercises/Problems: # 2 p. 344
2.
[Venture Present Values] The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:
A. Assume annual cash flows are expected to remain at the $800,000 level after Year 5 (i.e., Year 6 and thereafter). If TecOne investors want a 40 percent rate of return on their investment, calculate the venture’s present value.
B. Now assume that the Year 6 cash flows are forecasted to be $900,000 in the stepping-stone year and are expected to grow at an 8 percent compound annual rate thereafter. Assuming that the investors still want a 40 percent rate of return on their investment, calculate the venture’s present value.
C. Now extend Part B one step further. Assume that the required rate of return on the investment will drop from 40 percent to 20 percent beginning in Year 6 to reflect a drop in operating or business risk. Calculate the venture’s present value.
D. Let’s assume that TecOne investors have valued the venture as requested in Part C. An outside investor wants to invest $3 million in TecOne now (at the end of Year 0). What percentage of ownership in the venture should the TecOne investors give up to the outside investor for a $3 million new investment?

Chapter 9: Softec Mini Case: p. 348 A- F only

MINI CASE: SoftTec Products company
The SoftTec Products Company is a successful, small, rapidly growing, closely held corporation. The equity owners are considering selling the firm to an outside buyer and want to estimate the value of the firm. Following is last year’s income statement (2010) and projected income statements for the next four years (2011–2014). Sales are expected to grow at an annual 7 percent rate beginning in 2015 and continuing thereafter.
ACTUAL
PROJECTED

[$ THOUSANDS] 2010 2011 2012 2013 2014
Net sales $150.0 $200.0 $250.0 $300.0 $350.0
Cost of goods sold −75.0 −100.0 −125.0 −150.0 −175.0
Gross profit 75.0 100.0 125.0 150.0 175.0
SG&A expenses −30.0 −40.0 −50.0 −60.0 −70.0
Depreciation −7.5 −10.0 −12.5 −15.0 −17.5
Earnings before interest and taxes 37.5 50.0 62.5 75.0 87.5
Interest −3.5 −3.5 −3.5 −3.5 −3.5
Earnings before taxes 34.0 46.5 59.0 71.5 84.0
Taxes (40% rate) −13.6 −18.6 −23.6 728.6 −33.6
Net income $ 20.4 $ 27.9 $ 35.4 $ 42.9 $ 50.4
Selected balance sheet accounts at the end of 2010 were as follows. Net fixed assets were $50,000. The sum of the required cash, accounts receivable, and inventories accounts was $50,000. Accounts payable and accruals totaled $25,000. Each of these balance sheet accounts was expected to grow with sales over time. No changes in interest-bearing debt w4. Why is it usually easier to forecast sales for seasoned firms in contrast with early-stage ventures?
It is usually easier to forecasts sale for seasoned firms because they have a sales history from which an analyst can base their future sales projections while early stage ventures lack a basis on which to make sales projections
MINI CASE: Pharma Biotech Corporatio
Calculate the following financial ratios (as covered in Chapter 5) for Pharma Biotech for 2010: (a) net profit margin, (b) sales-to-total-assets ratio, (c) equity multiplier, and (d) total-debt-to-total-assets. Apply the return on assets and return on equity models. Discuss your observations.

Net Profit Margin
Net Profit Margin=(Net Income)/Sales
=960/15,000
=6.4%
Sales-to-Total-Assets Ratio
Sales to Total Assets Ratio=Sales/(Total Assets)
=15,000/12,000
=1.25 times
Equity Multiplier
Equity Multiplier=(Total Assets)/(Total Shareholders^’ Equity)
Total Shareholders^’ Equity=Common Stock+Retained Earnings
=2,400+2,800=5,200
∴Equity Multiplier=12,000/5,200
=2.3077 times
Total-Debt-to-Total-Assets
Total Debt to Total Assets=(Total Debt)/(Total Assets)
Total Debt=Total Current Liabilities + Long term Debt
=4,600+2,200=6,800
∴Total Debt to Total Assets=6,800/12,000
=56.67%
ROA Model=6.40%×1.25=8.00% [Check: 960/12,000=8.00%]
ROE Model=6.40%×1.25×2.3077=18.46% [Check: 960/5,200=18.46%]
Estimate Pharma’s sustainable sales growth rate based on its 2010 financial statements. [Hint: You need to estimate the beginning of period stockholders’ equity based on the information provided.] What financial policy change might Pharma Biotech make to improve its sustainable growth rate? Show your calculations.
Beginning stockholders’ equity = ending stockholders’ equity – added 2010 retained earnings
= (2,400 + 2,800)– 576
= 5,200 – 576 = 4,624
g =(960/15,000)×(15,000/12,000)×(12,000/4,624)×(1 – 0.40)
= .064 × 1.2500×2.5952× 0.6
= 0.1246
= 12.46%

The cash dividends, which should be paid at a rate of 40% of net inco will restrict Pharma Biotech from expanding its operations more rapidly without having to issue more equity capital. For instance, a policy of no cash dividends payout (i.e., a 100% retention rate) would result in a sustainable sales growth rate of:
g = .064×1.2500×2.5952× 1.00
=0.2076
= 20.76%

Estimate the additional funds needed (AFN) for 2011, using the formula or equation method presented in the chapter.
2011 sales = 15,000×1.50 = 22,500
Change in sales = 22,500 – 15,000 = 7,500
Retention Rate (RR)= 1 – Dividend Payout Ratio
= 1 – 0.40 = 0.60
AFN 2011 = ($12,000/$15,000)×$7,500 – ×$7,500 – $22,500 ×($960/$15,000)×0.60
= 0.8000($7,500)-0.1867($7,500)-$22,500(0.0640)(0.60)
= $6,000 – $1,400 – $864
= $3,736

Also, estimate the AFN using the equation method for Pharma Biotech for 2012. What will be the cumulative AFN for the two-year period?
2011 sales = 22,500 (from Part C)
2012 sales = 22,500 ×1.80 = 40,500
Change in sales = 40,500 – 22,500 = 18,000 2011
Net profit = 22,500 × .064 = 1,440
2011 total assets = 12,000 × 1.50 = 18,000
2011 non-interest bearing current liabilities
= (1,600 + 1,200) × 1.50 = 4,200
AFN 2012 = (18,000/22,500)×18,000 – (4,200/22,500) ×18,000 – 40,500×(1,440/22,500) ×(1 – 0.40)
=0.80(18,000) -0.1867(18,000) – 2,592(0.6)
= 14,400 – 3,361 – 1,555 = 9,484
Or,Total Net Sales = $22,500 + $40,500 = $63,000
Total change in Net Sales = $40,500 – $15,000 = $25,500
Total AFN = 0.8000($25,500) -0.1867($25,500) – $63,000(0.0640)(0.60)
= $20,400 – $4,761 – $2,419
= $13,220
Expected Rate of Return and Hubris Premiums
Calculate the expected rate of return before considering premiums for illiquidity, advisory activities, and hubris projections.
Expected rate of return = 6%+11.5%=17.
Estimate the hubris projections premium for this FirstVenture investment.
Hubris projections premium=40%-17.5%-5.5%-9.0%=8.0%
VentureBanc investors’ target rate of return:
VentureBanc uses a systematic risk measure of 2.0. Based on the information shown, estimate VentureBanc’s investment risk premium. Then estimate the cost of equity capital for VentureBanc.
Investment Risk Premium=Market Risk Premium × Beta
=7.5%×2.0
=15%
Cost of Equity=Risk Free Rate+Market Risk Premium×Beta
=6%+7.5%+2.0%
=21%
Determine the rate components and their returns that a venture investor like VentureBanc would require to be covered beyond a traditional cost-of-equity estimate.
Liquidity premium,Advisory Premium and Hubris Projections Premium
What overall venture investment discount rate would be used by VentureBanc?
Venture Investment Discount Rate=Cost of Equity+Liquidity Premium+Advisory Premium+ Hubris Projections Premium
=21%+5%+9%+15%
=50%
Kareem Construction Company
Calculate the after-tax WACC for Kareem.
Total Value (interest bearing debt plus Equity Capital)
=$200,000+$200,000+600,000
=$1,000,000
WACC={Short Term Debt Rate×(1-Tax Rate)×Proportion of Short Term Debt}+{Long Term Debt Rate ×(1-Tax Rate )×Proportion of Long Term Debt}+{Equity Rate× Proportion of Equity}
={12%× (1-30%)×$200,000/$1,000,000}+{14%× (1-30%)×$200,000/$1,000,000}+{22%×$600,000/$1,000,000}
=8.4%×.02+9.8%×0.2+22%×0.6
=1.68%+1.96%+13.20%
=16.84%
Show how Kareem’s WACC would change if the tax rate dropped to 25 percent and the estimated cost of equity capital were based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a systematic risk measure or beta of 2.0.
New Cost of Equity=Risk Free Rate+Market Risk Premium×Beta
=7%+8%×2.0%=23%
={12%× (1-25%)×$200,000/$1,000,000}+{14%× (1-25%)×$200,000/$1,000,000}+{22%×$600,000/$1,000,000}
=9%×0.2+10.5%×0.2+23%×0.6
=1.8%+2.1%+13.80%
=17.70%
Voice River, Inc.
Determine the historical average annual market risk premium for small-firm common stocks
Avg.historical MRP=Avg.Historical Return-Avg.Historical Risk Free Rate
=17.3%-5.7%=11.6%
Use CAPM to estimate the cost of common equity capital for Voice River
Using CAPM=Risk Free Rate+(Market Risk Premium×Beta)
Cost of Equity=7%+(11.6%×1.0)
=7.0%+11.6%
=18.6%
Calculate the net profit margin, total-sales-to-total-assets ratio, the equity multiplier, and the return on equity for both 2009 and 2010 for the Castillo Products Corporation. Describe what happened in terms of financial performance between the two years.
2009 Net Profit Margin=(-65,000)/900,000×100=-7.22%
2010 Net Profit Margin=75,000/1,500,000×100=5.00%

2009 Total Sales to Total Assets=900,000/1,000,000=0.9Times
2010 Total Sales to Total Assets=1,500,000/1,200,000=1.25Times

2009 Equity Multiplier=1,000,000/(150,000+200,000+80,000)=2.33 Times
2010 Equity Multiplier=1,500,000/(150,000+200,000+120,000)=2.55 Times

2009 Return on Equity=65,000/430,000×100=15.22%
2010 Return on Equity=75,000/470,000×100=15.96%
The company overall profitability generally increased between 2009 and 2010 as evidenced by the net profit margin in went from negative to positive. Moreover, there was an increase in assets turnover, which is indication that the company was utilizing assets more effectively and efficiently to generate sales. Additionally, the equity multiplier increased indicating greater usage of debt funds. Cumulatively, these changes resulted in a slight increase in return on equity, which reiterates the increase in the company’s profitability.
Estimate the cost of short-term bank loans, long-term debt, and common equity capital for the Castillo Products Corporation.
Cost of Short Term Bank Loans
Current Interest Rate=8.0%
Cost of Default Risk Free Long-Term Government Bonds:
Current Interest Rate=7%
Cost of Risky Long-Term Debt
Cost of Risky Debt= Longterm Government Bond Rate + Default Risk Premium + Liquidity Premium
=7%+6%+3%=16.0%
= Longterm Government Bond Rate + Large Firm Market Risk Premium ×Market Beta
=7%+6%(1.0)
=13.0%
Costillo Products Common Equity Capital
Using CAPM=7%+6%(2)
=19%
Although, Castillo Products paid a low effective tax rate in 2010, a 30 percent income tax rate is considered more appropriate when looking to the future. Estimate the after-tax cost of short-term bank loans, long-term debt, and the venture’s common equity.
After tax cost of short term bank loans:
=8.0%×(1-0.30)=5.6%
After tax cost of risky long term debt:
=16.0%×(1-0.30%)=11.2%
After tax cost of Castillo Products’ common Equity:
=19.0%
Estimate the weighted average cost of capital (WACC) for the Castillo Products Corporation using the book values of interest-bearing debt and stockholders’ equity capital at the end of 2010.
Bank Values Amount ($) Percentage Weight Cost After-Tax Cost Component Cost
Bank Loan 100,000 10.31% 5.60% 0.58%
Long-term Debt 400,000 41.24% 11.20% 4.62%
Common Equity 470,000 48.45% 19.0% 4.62%
Total 970,000 100% 14.41%
Cindy and Rob estimate that the market value of the common equity in the venture is $900,000 at the end of 2010. The market values of interest-bearing debt are judged to be the same as the recorded book values at the end of 2010. Estimate the market value-based weighted average cost of capital for Castillo Products.
Market Values Amount ($) Percentage Weight Cost After-Tax Cost Component Cost
Bank Loan 100,000 7.14% 5.60% 0.40%
Long-term Debt 400,000 28.57% 11.20% 3.20%
Common Equity 900,000 64.29% 19.0% 12.22%
Total 1,400,000 100% 15.82%

Would you recommend to Cindy and Rob that they use the book value–based WACC estimate or the market value–based WACC estimate for planning purposes? Why?
I would advise Cindy and Bob to use the book value based WACC. Market value-based WACC is superior to book value-based WACC because it represents the true cost of capital in an efficient market (i.e. a market where the current price of a security reflects all the information currently available about that security) (Baker & Powell, 2005). Market value weights provide current estimates for required rates of return of the firm’s suppliers of capital (Brigham & Ehrhardt, 2008). If the firm is operating at its target or optimal capital structure, then it is advisable to use the market values of debt and equity. The main shortcoming of using market value based WACC is the fact that market value weights change very frequently (Pratt & Grabowski, 2010). An average market price can however be used to solve this challenge (Lasher, 2014).
References
Baker, H. K. & Powell, G. E., 2005. Understanding Financial Management : a Practical Guide.. 1 ed. Blackwell Publishers: Oxford.
Brigham, E. F. & Ehrhardt, M. C., 2008. Financial management : theory & practice. 12 ed. Mason, Ohio : Thomson Business and Economics,.
Lasher, W., 2014. Practical financial management. 12 ed. Mason, OH: South-Western Cengage Learning.
Leach, J. & Melicher, R., 2012. Entrepreneurial Finance. 5 ed. Mason, OH: Cengage Learning.
Pratt, S. P. & Grabowski, R. J., 2010. Cost of capital : applications and examples. 4 ed. Hoboken, N.J. : John Wiley & Sons.

ere projected, and there were no plans to issue additional shares of common stock. There are currently 10,000 shares of common stock outstanding.
Data have been gathered for a comparable publicly traded firm in the same industry that Soft-Tec operates in. The cost of common equity for this other firm, Wakefield Products, was estimated to be 25 percent. SoftTec has survived for a period of years. Management is not currently contemplating a major financial structure change and believes a single discount rate is appropriate for discounting all cash flows.
A. Project SoftTec’s income statement for 2015.
B. Determine the annual increases in required net working capital and capital expenditures (CAPEX) for SoftTec for the years 2011 to 2015.
C. Project annual operating free cash flows for the years 2011 to 2015.
D. Estimate SoftTec’s terminal value cash flow at the end of 2014.
E. Estimate SoftTec’s equity value in dollars and per share at the end of 2010.
F. SoftTec’s management was wondering what the firm’s equity value (dollar amount and on a per-share basis) would be if the cost of equity capital were only 20 percent. Recalculate the firm’s value using this lower discount rate.
G. Now assume that the $35,000 in long-term debt (and therefore interest expense at 10 percent) is expected to grow with sales. Recalculate the equity using the original 25 percent discount rateGo