2. Since growth is stable for ApparelCo, you decide to start the continuing value with year 3 cash flows (i.e., cash flows in year 3 and beyond are part of the continuing value). Using the key value driver formula (and data provided in Question 1), what is the continuing value as of year 2? Using discounted cash flow, what is the value of operations for ApparelCo? What percentage of ApparelCo's total operating value is attributable to the continuing value? How does this result compare with your answer in Question 1? 3. Using the economic-profit formula, what is the continuing value for ApparelCo as of year 5? Using discounted economic profit, what is the value of operations for ApparelCo? What percentage of ApparelCo's total operating value is attributable to current invested capital, to interim economic profits, and to economic profits in the continuing-value period? 4. Since growth is stable for ApparelCo, you decide to start the continuing value with year 3 economic profits (i.e., economic profits in year 3 and beyond are part of the continuing value). Using the economic-profit formula (and data provided in Question 1), what is the continuing value as of year 2? Using discounted economic profit, what is the value of operations for ApparelCo? What percentage of ApparelCo's total operating value is attributable to the continuing value? How does this compare with the answer you obtained in Question 2? 5. A colleague suggests that a 6 percent growth rate is too low for revenue, profit, and cash flow growth beyond year 5. He suggests raising growth to 12 percent in the continuing-value period. If NOPAT equals $26.6 million in year 6, return on new invested capital (RONIC) equals 15 percent, and the cost of capital equals 10 percent, what is the continuing value as of year 5? Is there an alternative model that would perform better? Explain. 6. SuperiorCo earns a return on invested capital of 20 percent on its existing stores. Given intense competition for new store sites, you believe that new stores will only earn their cost of capital. Consequently, you set return on new invested capital (RONIC) equal to the cost of capital (8 percent) in the continuing-value formula. A colleague argues that this is too conservative, as SuperiorCo will create value well beyond the forecast period. What is the flaw in your colleague's argument?

Using the methodology outlined in Exhibits 13.12 and 13.13, forecast the financing items on next year's balance sheet for PartsCo. Assume that short-term debt remains at $90 million, long-term debt remains at $210 million, no equity is raised, and the firm maintains the same dividend payout ratio as the current year. Use either newly issued debt or excess cash and marketable securities as the funding plug to balance the balance sheet. Your forecast should be consistent with the forecasts in Questions 2 and 3. 5. The chief financial officer of PartsCo has asked you to rerun the forecast of the company's income statement and balance sheet at a growth rate of 3 percent. If the company generates more cash than it needs, how could the balance sheet be adjusted to handle this? What alternatives exist to handle new cash? 6. The chief financial officer of PartsCo returns again and explains that there is a possibility of a huge contract being awarded to the company. If this occurs, then the company is expected to achieve 25 percent revenue growth annually for the next five years. How does this affect the pro forma balance sheet? Which accounts are notably different than in the prior situations?

question 1

4. Consider a European-type derivative security with maturity T on a non-dividend paying stock. The value (payoff) of this security at maturity date T is a function of terminal stock price Sr, and has the following payoff diagram: 60 30 ST 30 60 a. Devise a portfolio of only call and put options that replicates the value (payoff) of this derivative security at the expiration date. b. What kind of bet is the investor making? c. Suppose, the price of the derivative security now is 10, stock price is 30, 7-2 months and the monthly interest rate is 3%. Find the prices of put and call options with strike price 30. d. Devise a portfolio of only call options, zero coupon bonds and stocks that replicates the value (payoff) of this derivative security at the expiration date. e. Suppose, the price of the derivative security now is 10, stock price is 30, 7=2 months and the monthly interest rate is 3%, call price is 5. Are there arbitrage opportunities? If so, design an arbitrage strategy trading in call, stock, derivative and zero-coupon bond to earn costless profit.