1. Suppose that a potential buyer has offered to buy this company in five years. Based on the present value you calculated above, what would be a reasonable amount for which the company should be sold at that future time?

2.What are the implications of the change in present value based on risk? In other words, what does the change mean to the company, and how would you, as a financial manager, interpret it? Be sure to justify your reasoning.

3. Based on the future value of the company that you calculated, and being mindful of the need to effectively balance portfolio risk with return, what recommendation would you make about purchasing the company as an investment at that price? Be sure to substantiate your reasoning.

Milestone One: Time Value of Money (please fill in shaded YELLOW cells, row 6D - 6H) Interest Rate 8% FCF1 Amounts* FCF2 FCF3 113 111 108 Pv* (104.63) ($95.16) ($85.73) Total Pv* *In millions (425.78) Pv=FVN/(1+I)^N PV(I,N,0,FV) ELLOW cells, row 6D - 6H) FCF4 Explanations: FCF5 101 97 ($74.24) ($66.02) FCF (Free Cash Flow) is the net change in cash business during a reporting period, minus cash ou expenditures, and dividends during the same perio the ability of an entity to remain in business. Note: For this part of the Milestone, please use pag under property. Interest Rate (given) - in our scenario we will us an implicit rate, the average rate that lease consu market. Flow) is the net change in cash generated by the operations of a reporting period, minus cash outlays for working capital, capital dividends during the same period. FCF is a strong indicator of tity to remain in business. of the Milestone, please use page 43 -capital lease payments ven) - in our scenario we will use 8% interest rate. This rate is he average rate that lease consumers face on the current Milestone Two: Stock Valuation and Bond Issuance PART I: STOCK VALUATION Dividend from Financial Statements: Year Cash Div/share ($) 2012 2013 2014 1.16 1.56 1.88 1. Stock Valuation - The new dividend yield if the company increased its dividend per shar Year Cash Div/Share ($) +1.75 2012 2013 2014 2.91 3.31 3.63 2. The dividend yield if the firm doubled it's outstanding shares Year Cash Div/Share ($) 2012 2013 2014 0.58 0.78 0.94 3. The rate of return on equity (i.e., the cost of stock) based on the new dividend yield you Year Cash Div/Share ($) +1.75 2012 2013 2014 2.91 3.31 3.63 PART II: BOND ISSUANCE Curent Bonds from Financial Statements Present Value Periods Interest Payments PV N I PMT Future Value FV 1. The new value of the bond if overall rates in the market increased by 5% Present Value Periods Interest Payments Future Value PV N I PMT FV 2. The new value of the bond if overall rates in the market decreased by 5% Present Value Periods Interest Payments Future Value PV N I PMT FV 3. The value of the bond if overall rates in the market stayed exactly the same - identical to CURRENT BOND VALUE from Financial Statements n and Bond Issuance (please fill in the shaded YELLOW cells) al Statements: Dividend Yield 2.30% 2.20% 2.30% end yield if the company increased its dividend per share by 1.75 Dividend Yield 5.77% 4.67% 4.44% oubled it's outstanding shares Dividend Yield 1.15% 1.10% 1.15% ., the cost of stock) based on the new dividend yield you calculated above Stock Price 50.4347826087 70.9090909091 81.7391304348 ancial Statements ($2,963) 40 2.9375 0 $9,433.58 erall rates in the market increased by 5% ($2,963) 40 0.054375 0 $24,634.04 erall rates in the market decreased by 5% rates in the market stayed exactly the same T BOND VALUE from Financial Statements ($2,963) 40 0.004375 0 $3,528.32 lls) Stockholder's Equity Stock Price (in millions) 17,777 50.434782609 12,522 70.909090909 9,322 81.739130435 Stockholder's Equity Stock Price (in millions) 17,777 50.434782609 12,522 70.909090909 9,322 81.739130435 Stockholder's Equity Stock Price (in millions) -doubled 35,554 50.434782609 25,044 70.909090909 18,644 81.739130435 culated above Return on Investment 3.72% 3.78% Semi-annual payment: 2036-2016 = 20 years *2 = 40 periods Interest paid semi-annually: 5.875%/2 = 2.9375% This bond does not make regular PMT except for interest CALCULATING FV (please see help on the right hand side) Please adjust interest 5.875%+5% = 10.875%/2 = 5.4375% CALCULATING FV (please see help on the right hand side) Please adjust interest 5.875%-5% = 0.875%/2 = 0.4375% CALCULATING FV (please see help on the right hand side) Explanations: Cash Dividend - distribution of the corporate income. They are not expenses and do not on Income Statement. Note: Part of Statement of Cash Flows. Please be aware that corporation list 5 years worth dividends, Yield but only 3 years worth of dividend yields research Dividend - annual cash dividend per share of(Hint: common stock F-1). divided by the market of a share of the common stock (Dividend yield = Annual Dividend/Current Stock Price). Note: Current Stock Price is not part of the Financial Statements - calculated using the form for Dividend Yield Stockholder's Equity = Assets - Liabilities. Equity represents the ownership of a corpora Owners are called stockholders because they hold stocks or shares of the company. The g every corporate manager is to generate shareholder value. Return on Equity - for this part we will modify and use return on investment instead. Using the formula: Dividend (+1.75)/+[(new price-old price)/old price] Note - for this part, you will need extra price from 2011 Bonds are a long-term debt for corporations. In buying a bond, the bond-owner lends mon the corporation. The borrower promises to pay specified interest rate during the loan's life and at the maturity, payback the entire principle. In case of bankruptcy, bondholders hav priority over stockholders for any payment distributions. Bonds = Debt...............Bondholders = Lenders Stock=Equity................Stockholders = Owners Calculation: Please note that for bond calculations, only one bond is used and we assum February 1, 2015 is the origination date. The value on financial statements will be conside (Present value). Maturity date is assumed for February 2036 and payment schedule adjust February 1 and August 1. The following Senior-Note was used from page 44: 5.875% Senior Notes; due December 16, 2036; interest payable semi-annually on June 16 December 16 PV (Present Value) = 2,963 million Our scenario: 5.875% Senior Notes; due February 1, 2036; interest payable semi-annual February 1 and August 1 PV (Present Value) = 2,963 million February 1 and August 1. The following Senior-Note was used from page 44: 5.875% Senior Notes; due December 16, 2036; interest payable semi-annually on June 16 December 16 PV (Present Value) = 2,963 million Our scenario: 5.875% Senior Notes; due February 1, 2036; interest payable semi-annual February 1 and August 1 PV (Present Value) = 2,963 million FV (Future Value Calculation) - using Excel Formula Step 1) Select Formulas Step 2) Click on Financial Step 3) Select FV - you will see the formula below Step 4) Enter the following: Rate - enter as decimal, no % sign. Example: 4% as 0.04 Nper - number of period. Enter a whole number. Example 50 Pmt - payment. Our example does not assume regular payments disbursing principal Pv - Present value. Enter as negative. Example $1,000 should be -1000 Type - leave blank are not expenses and do not appear corporation list 5 years worth of search n stock F-1). divided by the market price vidend/Current Stock Price). nts - calculated using the formula nts the ownership of a corporation. shares of the company. The goal of rn on investment instead. old price] nd, the bond-owner lends money to rest rate during the loan's lifetime bankruptcy, bondholders have e bond is used and we assume ial statements will be considered PV and payment schedule adjusted to able semi-annually on June 16 and interest payable semi-annually on ents disbursing principal d be -1000 Milestone Three: Capital Budgeting Data (please fill in the shaded YELLOW cells) Initial Outlay ($65,000,000) Cash Flows (Sales) - Operating Costs (excluding Depreciation) - Depreciation Rate of 20% Operating Income (EBIT) - Income Tax (Rate 35%) After-Tax EBIT + Depreciation Cash Flows ($65,000,000) NPV IRR ase fill in the shaded YELLOW cells) WACC 8% CF1 CF2 $50,000,000 $25,500,000 (13,000,000) 37,500,000 13,125,000 24,375,000 13,000,000 37,375,000 $45,000,000 $25,500,000 (13,000,000) 32,500,000 11,375,000 21,125,000 13,000,000 34,125,000 Select from drop downs below: $9,785,570.71 ACCEPT 50% ACCEPT CF3 $65,500,000 $25,500,000 (13,000,000) 53,000,000 18,550,000 34,450,000 13,000,000 47,450,000 CF4 $55,000,000 $25,500,000 (13,000,000) 42,500,000 14,875,000 27,625,000 13,000,000 40,625,000 CF5 $25,000,000 $25,500,000 (13,000,000) 12,500,000 4,375,000 8,125,000 13,000,000 21,125,000 Capital Budgeting Example Set-up Initial investment $65,000,000 Straight-line Depreciation of 20% Income Tax @35% WACC of 8% approximately. (HD WACC was about 8.83%) Cash Flow (which in this case are Sales Revenues) are as follow CF1: $50,000,000 CF2: $45,000,000 CF3: $65,500,000 CF4: $55,000,00 CF5: $25,000,000 Operating Costs CF1: $25,500,000 CF2: $25,500,000 CF3: $25,500,000 CF4: $25,500,000 CF5: $25,500,000 WACC- why do we use WACC rate for new projects? If the proje doesn't earn more percent than WACC, the corporation should abandon the project and invest money elsewhere. Initial Investment - always negative. Corporation has to inves money ("lose" it till they recover it via sales) in order to gain fu benefit. ACCEPT REJECT WACC was about 8.83%) e Sales Revenues) are as follows: e for new projects? If the project WACC, the corporation should money elsewhere. gative. Corporation has to invest it via sales) in order to gain future Milestone Four: Interest Rate Implication (please fill in shaded YELLOW cells) 1. Original Scenario from Milestone 1 - Time Value of Money using 8% Interest Rate 8.00% FCF1 Amounts* FCF2 FCF3 113 111 108 Pv* (104.63) (95.16) (85.73) Total Pv* *In millions (425.78) 2. Change in interest rate and its implications - Lower Interest Rate (5%) Interest Rate 5.00% FCF1 Amounts* FCF2 FCF3 113 111 108 Pv* (107.62) (100.68) (93.29) Total Pv* *In millions (460.69) 3. Change in interest rate and its implications - Higher Interest Rate (15%) Interest Rate 15.00% FCF1 Amounts* Pv* Total Pv* *In millions FCF2 FCF3 113 111 108 (98.26) (83.93) (71.01) (359.18) ded YELLOW cells) Explanation: We will use Milestone 1 and Time Value of Mone analysis ney using 8% Two cases will be analyzed: Lower Interest Rate at 5% Higher Interest Rate at 15% FCF4 FCF5 101 97 (74.24) (66.02) erest Rate (5%) FCF4 FCF5 101 97 (83.09) (76.00) terest Rate (15%) FCF4 FCF5 101 97 (57.75) (48.23) ne 1 and Time Value of Money for Milesotne 4 e at 15% SUMMARY TAB TAB 1 TAB 2 1. Time Value of Money 113 111 108 1 1 1 2.30% 2.20% 2.30% 17,777 12,522 9,322 1 1 1 PART I - Stock Valuation 1.16 1.56 1.88 PART II - Bond Issuance Current Bond Value 0 New Value +5% 0 0 New Value - 5% 0 0 Note: This process could take up to 20 seconds 101 97 1 1 $9,433.58 5.4375 $24,634.04 0.4375 $3,528.32 TAB 3 Capital Budgeting TAB 4 Interest Rate Implication Budgeting 0 0 Rate Implication 0 0 $9,785,570.71 50%