6-7; 6-9; 6-12 . I need help with these finance questions.

PROBLEM 6-1 Cash provided by operations (CPBO) differs from free cash flow for the following reasons: 1. Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-2 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-3 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-4 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-5 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-6 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-7 Given Solution Legend Solution a-b. Balance Sheet Cash and Marketable Securit $ Accounts Receivable Inventories Current Assets $ Net Property Plant & Equipm Total $ 2015 500 6,000 9,500 16,000 17,000 33,000 100.00% Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owne 7,200 6,800 14,000 7,000 21,000 12,000 33,000 100.00% Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ $ $ $ $ 2015 30,000 (20,000) 10,000 (8,000) 2,000 (900) 1,100 (400) 700 100.00% Solution c. = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-8 Given Sales Cost of Goods sold/Sales Operating expenses/sales Interest expense Earnings before Taxes Tax rate Net Income Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution: $ $ 15,000,000 60% 30% 300,000 0.35 Note: PROBLEM 6-9 Solution Legend Given WalMart Statements of Cash Flow In Millions of USD (except for per share item 12 Months ended 1/31/2013 1/31/2012 Net Income 12,731.00 11,284.00 Depreciation and Non-cash Items 6,470.00 6,308.00 Deferred Taxes (8.00) 89.00 Changes in Working Capital 1,161.00 2,271.00 Cash from Operating Activities 20,354.00 19,952.00 Capital Investment Expenditures Cash from Investing Activities 1/31/2011 11,231.00 4,720.00 (129.00) 2,419.00 18,241.00 1/31/2010 10,267.00 4,265.00 263.00 249.00 15,044.00 (15,670.00) (14,463.00) (14,186.00) (12,351.00) (15,670.00) (14,463.00) (14,186.00) (12,351.00) Interest and Financing Cash Flows Total Cash Dividends Paid Issuance (Retirement) of Stock, Net Issuance (Retirement) of Debt, Net Cash from Financing Activities (334.00) (3,586.00) (7,691.00) 4,477.00 (7,134.00) (227.00) (2,802.00) (1,718.00) (92.00) (4,839.00) (349.00) (2,511.00) (3,580.00) 4,018.00 (2,422.00) 113.00 (2,214.00) (4,549.00) 4,041.00 (2,609.00) Foreign Exchange Effects Net Change in Cash 252.00 (2,198.00) 97.00 747.00 (101.00) 1,532.00 205.00 289.00 Solution: = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-10 Given: ($ billions) Net Property, Plant and Equipment (2008 $ 3.507 Less: Depreciation Expense (2009) 0.727 Plus: Capex (2009) Net Property, Plant and Equipment (2009 $ 3.500 Solution: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-11 Given: In Millions of $ Cash & Equivalents Short Term Investments Cash and Short Term Investments Accounts Receivable Inventories Total Current Assets Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt Total Current Liabilities $ 2015 2014 2013 2012 807,926 $ 560,960 $ 617,866 $ 658,255 178,994 197,408 182,442 614,513 986,920 758,368 800,308 1,272,768 2,028,060 2,365,823 2,341,609 2,302,447 1,456,271 1,441,024 1,450,258 1,262,308 4,471,251 4,565,215 4,592,175 4,837,523 1,138,770 1,601,413 1,584,959 1,416,367 878,454 901,546 902,164 863,683 1,038,633 789,285 979,675 821,126 531,635 386,879 303,214 248,028 $ 3,587,492 $ 3,679,123 $ 3,770,012 $ 3,349,204 Solution a: Operating Current Assets Operating Current Liabilities Operating Net Working Capital Solution b: Change in Operating Net Working Capital Solution c: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-12 Solution Legend = Value given in problem Given (refer to problem 6-7): Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity $ $ $ $ $ $ $ Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ Projected growth rate in revenues Tax rate 2015 500 1.52% 6,000 18.18% 9,500 28.79% 16,000 48.48% 17,000 51.52% 33,000 100.00% 7,200 6,800 14,000 7,000 21,000 12,000 33,000 2015 30,000 100.00% (20,000) -66.67% 10,000 33.33% (8,000) -26.67% 2,000 6.67% (900) -3.00% 1,100 3.67% (400) -1.33% 700 2.33% 20% 40% Solution: Pro forma Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income 2016 Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total 2016 Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity Additional Short-term Debt Needed 12,000 $ 21.82% 20.61% 42.42% 21.21% 63.64% 36.36% 100.00% - = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-13 Solution Legend = Value given in problem Given (refer to problem 6-12): Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity $ $ $ $ $ $ $ Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ 0.00% 7,200 6,800 14,000 7,000 21,000 12,000 33,000 0.00% 2015 30,000 100.00% (20,000) 10,000 (8,000) 2,000 (900) 1,100 (400) 700 Projected growth rate in revenues Tax rate 20% 40% Given (refer to problem 6-12): Pro forma Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income 2016 Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment (Note A) Total 2016 Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity Additional Short-term Debt Needed Solution: Estimated Free Cash Flow EBIT -Taxes NOPAT + Depreciation and Amortization - Increase in Operating Net Working Capital - CapEx = Free Cash Flow Note A: Depreciation expense for 2016 = 2016 $ = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output 2015 500 6,000 9,500 16,000 17,000 33,000 2,000 PROBLEM 6-14 Solution Legend Given Firm free cash flows (years 1 - 5) Cost of capital Terminal value multiple of cash flow (year 5) $ Solution a: Present value of cash flows for years 1-5 Solution b: Present value of the terminal value in year 5 Solution c: Enterprise Value = PV of interim cash flows + PV of Terminal Value 80 million 12% 5 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-1 Cash provided by operations (CPBO) differs from free cash flow for the following reasons: 1. Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-2 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-3 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-4 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-5 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-6 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-7 Given Solution Legend Solution a-b. Balance Sheet Cash and Marketable Securit $ Accounts Receivable Inventories Current Assets $ Net Property Plant & Equipm Total $ 2015 500 6,000 9,500 16,000 17,000 33,000 100.00% Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owne 7,200 6,800 14,000 7,000 21,000 12,000 33,000 100.00% Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ $ $ $ $ 2015 30,000 (20,000) 10,000 (8,000) 2,000 (900) 1,100 (400) 700 100.00% Solution c. = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-8 Given Sales Cost of Goods sold/Sales Operating expenses/sales Interest expense Earnings before Taxes Tax rate Net Income Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution: $ $ 15,000,000 60% 30% 300,000 0.35 Note: PROBLEM 6-9 Solution Legend Given WalMart Statements of Cash Flow In Millions of USD (except for per share item 12 Months ended 1/31/2013 1/31/2012 Net Income 12,731.00 11,284.00 Depreciation and Non-cash Items 6,470.00 6,308.00 Deferred Taxes (8.00) 89.00 Changes in Working Capital 1,161.00 2,271.00 Cash from Operating Activities 20,354.00 19,952.00 Capital Investment Expenditures Cash from Investing Activities 1/31/2011 11,231.00 4,720.00 (129.00) 2,419.00 18,241.00 1/31/2010 10,267.00 4,265.00 263.00 249.00 15,044.00 (15,670.00) (14,463.00) (14,186.00) (12,351.00) (15,670.00) (14,463.00) (14,186.00) (12,351.00) Interest and Financing Cash Flows Total Cash Dividends Paid Issuance (Retirement) of Stock, Net Issuance (Retirement) of Debt, Net Cash from Financing Activities (334.00) (3,586.00) (7,691.00) 4,477.00 (7,134.00) (227.00) (2,802.00) (1,718.00) (92.00) (4,839.00) (349.00) (2,511.00) (3,580.00) 4,018.00 (2,422.00) 113.00 (2,214.00) (4,549.00) 4,041.00 (2,609.00) Foreign Exchange Effects Net Change in Cash 252.00 (2,198.00) 97.00 747.00 (101.00) 1,532.00 205.00 289.00 Solution: = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-10 Given: ($ billions) Net Property, Plant and Equipment (2008 $ 3.507 Less: Depreciation Expense (2009) 0.727 Plus: Capex (2009) Net Property, Plant and Equipment (2009 $ 3.500 Solution: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-11 Given: In Millions of $ Cash & Equivalents Short Term Investments Cash and Short Term Investments Accounts Receivable Inventories Total Current Assets Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt Total Current Liabilities $ 2015 2014 2013 2012 807,926 $ 560,960 $ 617,866 $ 658,255 178,994 197,408 182,442 614,513 986,920 758,368 800,308 1,272,768 2,028,060 2,365,823 2,341,609 2,302,447 1,456,271 1,441,024 1,450,258 1,262,308 4,471,251 4,565,215 4,592,175 4,837,523 1,138,770 1,601,413 1,584,959 1,416,367 878,454 901,546 902,164 863,683 1,038,633 789,285 979,675 821,126 531,635 386,879 303,214 248,028 $ 3,587,492 $ 3,679,123 $ 3,770,012 $ 3,349,204 Solution a: Operating Current Assets Operating Current Liabilities Operating Net Working Capital Solution b: Change in Operating Net Working Capital Solution c: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-12 Solution Legend = Value given in problem Given (refer to problem 6-7): Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity $ $ $ $ $ $ $ Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ Projected growth rate in revenues Tax rate 2015 500 1.52% 6,000 18.18% 9,500 28.79% 16,000 48.48% 17,000 51.52% 33,000 100.00% 7,200 6,800 14,000 7,000 21,000 12,000 33,000 2015 30,000 100.00% (20,000) -66.67% 10,000 33.33% (8,000) -26.67% 2,000 6.67% (900) -3.00% 1,100 3.67% (400) -1.33% 700 2.33% 20% 40% Solution: Pro forma Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income 2016 Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total 2016 Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity Additional Short-term Debt Needed 12,000 $ 21.82% 20.61% 42.42% 21.21% 63.64% 36.36% 100.00% - = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-13 Solution Legend = Value given in problem Given (refer to problem 6-12): Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity $ $ $ $ $ $ $ Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ 0.00% 7,200 6,800 14,000 7,000 21,000 12,000 33,000 0.00% 2015 30,000 100.00% (20,000) 10,000 (8,000) 2,000 (900) 1,100 (400) 700 Projected growth rate in revenues Tax rate 20% 40% Given (refer to problem 6-12): Pro forma Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income 2016 Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment (Note A) Total 2016 Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity Additional Short-term Debt Needed Solution: Estimated Free Cash Flow EBIT -Taxes NOPAT + Depreciation and Amortization - Increase in Operating Net Working Capital - CapEx = Free Cash Flow Note A: Depreciation expense for 2016 = 2016 $ = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output 2015 500 6,000 9,500 16,000 17,000 33,000 2,000 PROBLEM 6-14 Solution Legend Given Firm free cash flows (years 1 - 5) Cost of capital Terminal value multiple of cash flow (year 5) $ Solution a: Present value of cash flows for years 1-5 Solution b: Present value of the terminal value in year 5 Solution c: Enterprise Value = PV of interim cash flows + PV of Terminal Value 80 million 12% 5 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 8-1 Given Sale price Square footage Selling price/sq ft Time on the market $ $ Comp #1 240,000.00 $ 2,240 107.14 $ 61 days Solution a. b. c. Average price per square foot Estimated Value Solution Legend Comp #2 265,000.00 2,145 123.54 32 days 2121 Tartar Circle 3,000 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 8-2 Solution Legend Current year EPS Growth rate in EPS for next year P/E Multiple (range) Estimated Value (current EPS) Estimated Value (forward EPS) $ 2.50 20% 10 15 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 8-3 THOUGHT QUESTION a. Parry Electronics is a regional electronics wholesaler and distributor which earned $1,250,000 in EBITDA this year based on revenues of $4,000,000. The enterprise values of publicly traded firms that operate in the same industry currently are valued at 5-6 times their current EBITDA. What is your estimate of the enterprise value of Parry Electronics? If Parry is small relative to the size of the comparison firms with assets only one-tenth the size of the largest firm in the industry, how would this influence your valuation estimate? Explain. Answer: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer req = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output THOUGHT QUESTION b. Suppose we have two companies, A and B which produce identical products using slightly different production processes. The process used by company A requires more capital equipment, which is already paid for, and can produce the the product at lower per unit costs. Now, assume that you have been asked to value Company B which is privately held and that you want to use Company A, which is publicly traded, as the basis for your valuation. Discuss how differences in the production processes of these firms affect both their multiples and discount rates. Relate your answer to the discussion of the valuation of the two office buildings discussed in the chapter. Answer: THOUGHT QUESTION c. In the tech sector, the price of an IPO is often stated as a multiple of its sales, which is then compared to the price/sales ratio of comparable firms. Why do you think that analysts use price/sales ratios in this setting rather than price/earnings ratios? Answer: Answer: The problem is that many of these firms do not have positive earnings, so sales is the best valuation metric that can be used. It should be noted that sales multiples are not particularly informative in most cases, and are only used when there are not good alternatives . PROBLEM 8-4 Given Solution Legend Per Square Foot A Building size (Sq. ft.) Rent Maintenance (fixed cost) Net Operating Income % Change in NOI Selling Price Information Sales multiple for NOI/sq. ft. Capitalization rate (1/Sales multiple) Estimated property value $ B 100 $ (23) 77 $ $ 120 $ (30) 90 $ A B ? ? ? 6 16.67% 462 $ Total Square Footage A B 80,000 90,000 8,000,000 $ 10,800,000 (1,840,000) (2,700,000) 6,160,000 $ 8,100,000 A $ 6 16.67% 36,960,000 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output B ? ? ? Solution a. Using the multiple of operating income, Building B can be valued at 6 x 8,100,000 = $48,600,000. b. Recognize that Building B has higher fixed costs (as a percentage of revenues) and therefore higher operating leverage. Per Square Foot Alternative Valuation Procedure Risk free rate Implied value of maintenance costs Implied revenue value Implied revenue multiple Implied revenue cap rate Property value/sq. ft. Implied multiple Implied cap rate A B 5.5% 5.5% Total Square Footage A B 5.5% 5.5% Building A % Change in Revenues Revenues Maintenance (fixed cost) Net Operating Income % Change in Revenues % Change in NOI Building B -20% 0% 20% -20% 0% 20% (1,840,000) (1,840,000) (1,840,000) (2,700,000) (2,700,000) (2,700,000) -20.00% 0.00% 20.00% -20.00% 0.00% 20.00% PROBLEM 8-5 Given Financial Information (Millions) Revenues EBITDA Net Income Earnings per Share Interest Bearing Debt Common Equity Total Assets O'Reilly 2,120.00 321.86 171.62 1.507 120.00 1,145.77 1,713.90 Advance $ 4,400.00 544.38 240.16 2.183 560.00 939.51 2,615.73 Auto Zone $ 5,890.00 1,130.00 562.44 7.301 1,720.00 641.16 4,401.85 0.105 43.95% 12.47% 18.50% $ 0.596 47.25% 9.42% 16.00% 2.683 49.09% 16.77% 13.00% 3,240.00 3,360.00 $ 3,040.00 3,600.00 $ 6,290.00 8,010.00 10.44 19.42 15.24 1.24 6.61 13.30 11.21 1.79 7.09 11.56 10.21 1.25 12.47% 14.98% 9.42% 25.56% 16.77% 87.72% 8.10% 123.69% 149.59% 5.46% 168.21% 278.42% 9.55% 133.81% 686.55% 14.98% 25.56% 87.72% Financial Ratios Debt to Equity Gross Margins Operating Margins Expected Growth in EPS (5 yrs) Market Valuations (Millions) Market Capitalization Enterprise Value $ Valuation Ratios Enterprise Value/EBITDA P-E Ratio (Trailing) P-E Ratio (Forward) Beta Operating Margin Return on Equity Profit Margin Asset Turnover Leverage Product Solution a. b. Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 8-6 Given Cost of goods sold/Revenues Fixed operating costs Variable operating costs/Revenues Depreciation expense Salary adjustments Annual outsourcing savings/Revenues $ $ $ Solution Legend 65% 350,000 10% 50,000 100,000 10% = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Historical Incomes Statements for Toys 'n Thing, Inc. 2014 Revenues $ 2,243,155 $ Cost of goods sold (1,458,051) Gross profits 785,104 General and Administrative Expenses* (574,316) Net Operating Income $ 210,789 $ 2013 2,001,501 $ (1,300,976) 700,525 (550,150) 150,375 $ 2012 2,115,002 (1,374,751) 740,251 (561,500) 178,751 *Includes depreciation expense of $50,000 per year. Solution a. Net Operating Income Plus: Depreciation expense EBITDA Valuation $ $ EBITDA Multiple 3 4 2014 210,789 50,000 260,789 Years 2013 $ 150,375 $ 50,000 $ 200,375 $ 2014 2012 178,751 50,000 228,751 2013 2012 2013 200,375 $ 100,000 2012 228,751 100,000 2013 2012 Average b. EBITDA Plus: Salary adjustments Plus: Outsourcing savings Adjusted EBITDA Valuation Average Asking price = 5 x 2010 Unadjusted EBITDA Estimated value after adjustments $ EBITDA Multiple 3 4 2014 260,789 100,000 2014 $ PROBLEM 8-7 Given Cost of goods sold/Revenues Fixed operating costs Variable operating costs/Revenues Depreciation expense Salary adjustments Annual outsourcing savings/Revenues Solution Legend 55.00% 250,000 10.00% 50,000 - $ $ $ $ = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution a. Revenues Cost of goods sold Gross profits General and Administrative Expenses* Net Operating Income *Includes depreciation expense of $50,000 per year. $ Scenario 1 1,000,000 $ Scenario 2 2,000,000 $ Scenario 3 4,000,000 $ Scenario 2 2,000,000 $ Scenario 3 4,000,000 Percentage change b. Fixed operating costs Variable operating costs/Revenues Revenues Cost of goods sold Gross profits General and Administrative Expenses* Net Operating Income *Includes depreciation expense of $50,000 per year. $ $ 50,000 30% Scenario 1 1,000,000 Percentage change Case (a), which had higher fixed costs but lower variable costs, has a higher operating leverage. This effect transaltes into a higher degree of sensitivity to changes in sales. As can be seen above, in case (a), when sales jump fro $2 million to $4 million, NOI jumps up by 156%. In case (b), the same change in sales results in only a 22% increase in NOI. Higher opertaing leverages will result in higher betas (assuming sales changes are correlated to the market). PROBLEM 8-8 Given Levered equity beta Risk free rate (10 year US Treasury bon Market risk premium Estimated earnings for 2007 Dividend payout ratio Stock price (12/07/06) 5-year growth rate estimate 1.27 5.02% 5.00% $ $ 5.69 0.026462039 dates 40.00% 86.01 10.00% Description Market Cap Sector: Industrial Goods Industry: Industrial Equipment & Components Emerson Electric Co. $34.61B Parker-Hannifin Corp. 9.81B Roper Industries Inc. 4.44B Pentair Inc. 3.23B Walter Industries Inc. 2.19B P/E 16.606 15.900 19.276 14.150 24.685 17.943 23.537 Given Return on Equity % 14.94% 18.40% 23.72% 18.16% 14.27% 11.56% 15.70% Dividend Yield % 1.48% 1.41% 2.40% 1.20% 0.50% 1.70% 0.30% Long-term Debt to Price to Equity Book Value 0.87 50.471 0.649 10.11 0.494 4.257 0.308 2.298 0.603 3.122 0.485 1.974 4.036 2.731 Net Profit Price To Free Margin Cash Flow 5.40% 75.481 7.90% -134.900 9.54% 65.156 8.25% 34.392 11.89% 232.735 4.48% 147.667 7.38% -10.682 Solution Legend a. = Value given in problem Emerson Comparison to Industry = Formula/Calculation/Analysis required P/E ROE Dividend Yield LTD to Equity = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Price to Book Net Profit Margin Price to Cash Flow b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price c. Imputed growth rate using projected dividends Impute growth rate using historical dividend yields PROBLEM 8-9 Given Beta Dividend payout ratio EPS for 2007 Stock Price (12/07/06) Anticipated growth rate in EPS (5 years) Description Sector: Technology Industry: Semiconductor - Broad Line Intel Corp. Texas Instruments Inc. STMicroelectronics NV Advanced Micro Devices Inc. Analog Devices Inc. Maxim Integrated Products Inc. National Semiconductor Corp. 1.66 48% 1.13 20.88 12% $ $ Market Cap 5344.81B 252.89B 120.51B 44.62B 16.35B 11.79B 11.48B 10.28B 8.04B = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output P/E 27.716 19.9 17.622 11.08 24.959 21.152 22.667 23.025 18.049 Return on Dividend Yield Long-term Debt Equity % % to Equity 14.77% 1.90% 0.691 16.20% 1.30% 0.096 19.63% 1.90% 0.064 22.94% 0.50% 0.004 7.81% 0.70% 0.209 12.61% 0.00% 0.138 15.42% 1.90% NA 16.93% 1.90% NA 25.67% 0.60% 0.012 Solution Intel Comparison to Industry a. P/E ROE Dividend Yield LTD to Equity Price to Book Net Profit Margin Price to Cash Flow b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price c. Imputed growth rate d. Estimated future dividends Future growth rate Value of Intel Shares (2-stage) 2007-2011 2011 and beyond Estimated equity value Solution Legend Year Earnings 2007 $ 1.13 2008 2009 2010 2011 Dividends The growth rate in earnings that makes the value of Intel's shares $20.88 is found using Goal Seek. Price to Book Value 5.588 3.42 3.437 3.71 1.764 2.088 3.342 3.681 4.481 Net Profit Margin 10.39% 15.50% 18.72% 18.67% 8.24% 10.13% 21.48% 21.39% 22.18% Price To Free Cash Flow 55.435 193.3 121.039 -5577.55 -11.219 -58.916 311.392 NA 154.483 PROBLEM 8-10 Solution Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Given Solution Legend Exhibit P9-11.2 Various share prices Expected IPO share price Diluted shares outstanding (millions) Equity value (millions) Plus: net debt (millions) Enterprise value (millions) $ $ 20.00 $ 51.6 1,032.00 $ 740 $1,772 2005E reserves 2006 EBITDAX 2007 EBITDAX Free Cash Flow (FCF) $ $ $ $ 700 302 280 191 22.00 $ 51.6 1,135.20 $ 688 $1,824 24.00 $ 51.6 1,238.40 $ 637 $1,875 26.00 $ 51.6 1,341.60 $ 585 $1,927 28.00 $ 51.6 1,444.80 $ 534 $1,978 30.00 51.6 1,548.00 482 $2,030 = Value given in problem = Formula/Calculation/Analysis req = Qualitative analysis or Short answ = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output million million million million Solution Part a. Expected IPO share price Enterprise Value/2005E reserves Enterprise Value/2006 EBITDAX Enterprise Value/2007 EBITDAX Enterprise Value/FCF Part b. Part c. Industry $ 20.00 $ 22.00 $ 24.00 $ 26.00 $ 28.00 $ 30.00 Mean Median Maximum Minimum 2.83 2.95 3.39 2.05 6.33 6.40 7.96 5.12 6.96 7.15 7.94 5.90 8.68 9.77 10.62 6.08 quired wer required PROBLEM 8-12 Given Solution Legend EXHIBIT 1 Financial Information 2003 Shares Outstanding 2003 Fiscal Close Stock Price Market Capitalization Short Term Debt Long Term Debt Cash & Equivalents Short Term Investments EBITDA Net Income Calculated EPS $ $ $ $ $ $ $ $ $ Earthlink ELNK 159,399,000 10.00 1,593,990,000 900,000 349,740,000 89,088,000 218,100,000 (62,200,000) (0.39) $ $ $ $ $ $ $ $ $ Yahoo YHOO 655,602,000 45.03 29,521,758,060 750,000,000 713,539,000 595,975,000 455,300,000 237,900,000 0.36 $ $ $ $ $ $ $ $ $ eBay EBAY 646,819,000 $ 64.61 $ 41,790,975,590 $ 2,800,000 $ 124,500,000 $ 1,381,513,000 $ 340,576,000 $ 818,200,000 $ 441,800,000 $ 0.68 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Microsoft MSFT 10,800,000,000 25.64 276,912,000,000 6,438,000,000 42,610,000,000 14,656,000,000 9,993,000,000 0.93 Solution Price to Earnings Enterprise Value EBITDA multiple (25.63) $1,245,150,000 5.71 124.09 $29,558,219,060 64.92 94.59 $40,536,762,590 49.54 27.71 $270,474,000,000 18.45 Average 55.19 34.66 Part a. Google EBITDA Cash Debt Net income Shares EPS IPO proceeds $ $ $ $ $ $ 800,000,000 430,000,000 10,000,000 400,000,000 271,219,643 1.47 1,670,000,000 Earthlink Imputed IPO price per share from PE ratio Impute EV from EBITDA multiples Owner's equity Impute IPO price per share Part b. Part c. Yahoo eBay Microsoft Average PROBLEM 8-13 Given Exhibit P6-11.1 Income Statement and Balance Sheet values are in Thousands XTO Energy Chesapeake Energy Ticker PERIOD ENDING Income Statement ($000) Total Revenue Cost of revenue Gross Profit Operating Expenses Selling, general, and administrative Depreciation, depleletion, and amortization Others Operating income or loss Income from Continuing Operations Total other income/expenses (net) Earnings before interest and taxes Interest expense Income before tax Income tax expense Net income from continuing operations Nonrecurring Events Effect of accounting changes Net income Preferred stock and other adjustments Net income applicable to common shares Balance Sheet ($000) Assets Current Assets Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets Long-term investments Property, plant, and equipment Goodwill Other assets Deferred long-term asset charges Total assets Liabilities Current Liabilities Accounts payable Short/Current long-term debt Other current liabilities Total current liabilities Long-term debt Other liabilities Deferred long-term liability charges Total Liabilities Stockholders' Equity Preferred stock Common stock Retained earnings Treasury stock Capital surplus Other stockholders' equity Total stockholders' equity Total liabilities and stockholders' equity Other Financial Data Exploration expenses (thousands) Shares Outstanding (millions) Year-end 2004 Closing Price Market Capitalization (millions) Devon Energy Apache Burlington Resources XTO 31-Dec-04 CHK 31-Dec-04 DVN 31-Dec-04 APA 31-Dec-04 2,709,268 204,821 2,504,447 9,189,000 1,535,000 7,654,000 5,332,577 946,639 4,385,938 5,618,000 1,040,000 4,578,000 165,092 414,341 11,880 919,290 896,290 615,822 992,335 1,616,000 2,334,000 3,704,000 173,194 1,270,683 162,493 2,779,568 215,000 1,137,000 640,000 2,586,000 919,290 93,661 825,629 317,738 507,891 (20,081) 972,254 167,328 804,926 289,771 515,155 64,000 3,768,000 475,000 3,293,000 1,107,000 2,186,000 857 2,780,425 117,342 2,663,083 993,012 1,670,071 2,586,000 282,000 2,304,000 777,000 1,527,000 507,882 507,882 515,155 515,155 2,186,000 (10,000) 2,176,000 (1,317) 1,668,754 (5,680) 1,663,074 1,527,000 1,527,000 9,700 14,713 364,836 47,716 436,965 5,624,378 49,029 6,110,372 6,896 51,061 477,436 32,147 567,540 136,912 7,444,384 95,673 8,244,509 1,152,000 968,000 1,320,000 - 143,000 3,583,000 753,000 19,346,000 5,637,000 417,000 29,736,000 111,093 1,022,625 157,293 57,771 1,348,782 13,860,359 189,252 104,087 15,502,480 2,179,000 994,000 124,000 158,000 3,455,000 11,033,000 1,054,000 202,000 15,744,000 425,173 75,534 259 500,966 2,053,911 199,753 756,369 3,510,999 872,539 91,414 963,953 3,076,405 107,395 933,873 5,081,626 1,722,000 1,378,000 3,100,000 7,796,000 366,000 4,800,000 16,062,000 1,158,131 21,273 103,487 1,282,891 2,619,807 1,022,880 2,372,481 7,298,059 1,182,000 2,000 415,000 1,599,000 3,887,000 851,000 2,396,000 8,733,000 3,484 1,239,553 (24,917) 1,410,135 (28,882) 2,599,373 6,110,372 490,906 3,169 262,987 (22,091) 2,440,105 (12,193) 3,162,883 8,244,509 1,000 48,000 3,693,000 9,087,000 845,000 13,674,000 29,736,000 98,387 209,320 4,017,339 (97,325) 4,106,182 (129,482) 4,098,239 11,396,298 5,000 4,163,000 (2,208,000) 3,973,000 1,078,000 7,011,000 15,744,000 599,500 332.9 $ 35.38 $ 11,778.00 184,300 253.2 16.50 4,177.80 279,000 482.0 $ 38.92 $ 18,759.44 2,300,000 327.5 $ 50.57 $ 16,561.68 258,000 392.0 $ 45.00 $ 17,640.00 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output BR 31-Dec-04 1,947,601 436,998 1,510,603 Solution Legend $ $ This is not the year-end price for BR. It is an estimate based on the 2004 price range. Solution (All values in thousands) a. XTO Energy Chesapeake Energy Devon Energy Apache Average Multiple for Comps Enterprise Value (EV) EBITDA EBITDAX EV/EBITDA Multiple EV/EBITDAX Multiple P/E Multiple EV based on EBITDA for BR using comps Plus: Cash Less: Interest-bearing debt Equity value Equity value per share EV based on EBITDAX for BR using comps Plus: Cash Less: Interest-bearing debt Equity value Equity value per share Equity value per share based on P/E multiple XTO Interest-bearing debt (ST<) Enterprise Value Calculations CHK DVN APA BR Burlington Resources (BR) - Actual Burlington Resources (BR) - 2005 Forecast Common equity (price x shares outstanding) Less: Cash and equivalents Equals: Enterprise value b. c. PROBLEM 8-14: Mini-Case "Dick's Sporting Goods IPO" Given Shares outstanding Offering Price 10/16/02 Solution Legend 9.40 million 12.25 $ Exhibit P6-12.3 Dick's Sporting Goods Financial Data ($ millions) Revenues Gross Profit EBIT Depreciation & Amortization EBITDA Balance Sheet Data 8/3/02 Checks Drawn Current Portion of Long Term Debt Revolving Bank Line of Credit Long Term Debt & Capital Leases Total Debt Cash Stockholder's Equity = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required $ $ $ $ $ 1,173.794 298.453 55.899 13.499 69.398 $ $ $ $ $ $ $ = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output 33.584 0.211 90.299 3.466 127.560 13.874 78.984 This represents the balance of checks written that have not cleared the firm's bank account. Debt/Capitalization 62% Debt/EBITDA 1.84x Source: Dick's Sporting Goods Prospectus S-1 dated September 27, 2002 Solution a. Implied Enterprise Valuation for DKS Based on Market Comparables Average Comps DKS Statistic Revenue Multiple 0.37x $ 1,173.794 EBITDA Multiple 5.20x $ 69.398 EBIT Multiple 8.30x $ 55.899 $ $ $ Implied EV 434.304 360.870 463.962 b. Determine DKS' Implied Equity Value by subtracting Net Debt Revenue Multiple EBITDA Multiple EBIT Multiple Implied Enterprise Value $ 434.304 $ 360.870 $ 463.962 DKS Net Debt $ (113.686) $ (113.686) $ (113.686) Implied Equity Implied IPO Value Value Per Share $ 320.618 $ 34.11 $ 247.184 $ 26.30 $ 350.276 $ 37.26 Dick's IPO priced at $12.25. Its market multiples were valued at a significant discount to the comparables. Equity Market Capitalization based on 9.47 million shares DKS Net Debt DKS Enterprise Value at IPO actual price of $12.25 Implied Multiple based on IPO Price EV/Revenue Multiple EV/EBITDA Multiple EV/EBIT Multiple Analysis: Discount to Comps PROBLEM 6-1 Cash provided by operations (CPBO) differs from free cash flow for the following reasons: 1. Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-2 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-3 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-4 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-5 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-6 Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-7 Given Solution Legend Solution a-b. Balance Sheet Cash and Marketable Securit $ Accounts Receivable Inventories Current Assets $ Net Property Plant & Equipm Total $ 2015 500 6,000 9,500 16,000 17,000 33,000 100.00% Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owne 7,200 6,800 14,000 7,000 21,000 12,000 33,000 100.00% Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ $ $ $ $ 2015 30,000 (20,000) 10,000 (8,000) 2,000 (900) 1,100 (400) 700 100.00% Solution c. = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-8 Given Sales Cost of Goods sold/Sales Operating expenses/sales Interest expense Earnings before Taxes Tax rate Net Income Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution: $ $ 15,000,000 60% 30% 300,000 0.35 Note: PROBLEM 6-9 Solution Legend Given WalMart Statements of Cash Flow In Millions of USD (except for per share item 12 Months ended 1/31/2013 1/31/2012 Net Income 12,731.00 11,284.00 Depreciation and Non-cash Items 6,470.00 6,308.00 Deferred Taxes (8.00) 89.00 Changes in Working Capital 1,161.00 2,271.00 Cash from Operating Activities 20,354.00 19,952.00 Capital Investment Expenditures Cash from Investing Activities 1/31/2011 11,231.00 4,720.00 (129.00) 2,419.00 18,241.00 1/31/2010 10,267.00 4,265.00 263.00 249.00 15,044.00 (15,670.00) (14,463.00) (14,186.00) (12,351.00) (15,670.00) (14,463.00) (14,186.00) (12,351.00) Interest and Financing Cash Flows Total Cash Dividends Paid Issuance (Retirement) of Stock, Net Issuance (Retirement) of Debt, Net Cash from Financing Activities (334.00) (3,586.00) (7,691.00) 4,477.00 (7,134.00) (227.00) (2,802.00) (1,718.00) (92.00) (4,839.00) (349.00) (2,511.00) (3,580.00) 4,018.00 (2,422.00) 113.00 (2,214.00) (4,549.00) 4,041.00 (2,609.00) Foreign Exchange Effects Net Change in Cash 252.00 (2,198.00) 97.00 747.00 (101.00) 1,532.00 205.00 289.00 Solution: = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-10 Given: ($ billions) Net Property, Plant and Equipment (2008 $ 3.507 Less: Depreciation Expense (2009) 0.727 Plus: Capex (2009) Net Property, Plant and Equipment (2009 $ 3.500 Solution: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-11 Given: In Millions of $ Cash & Equivalents Short Term Investments Cash and Short Term Investments Accounts Receivable Inventories Total Current Assets Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt Total Current Liabilities $ 2015 2014 2013 2012 807,926 $ 560,960 $ 617,866 $ 658,255 178,994 197,408 182,442 614,513 986,920 758,368 800,308 1,272,768 2,028,060 2,365,823 2,341,609 2,302,447 1,456,271 1,441,024 1,450,258 1,262,308 4,471,251 4,565,215 4,592,175 4,837,523 1,138,770 1,601,413 1,584,959 1,416,367 878,454 901,546 902,164 863,683 1,038,633 789,285 979,675 821,126 531,635 386,879 303,214 248,028 $ 3,587,492 $ 3,679,123 $ 3,770,012 $ 3,349,204 Solution a: Operating Current Assets Operating Current Liabilities Operating Net Working Capital Solution b: Change in Operating Net Working Capital Solution c: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-12 Solution Legend = Value given in problem Given (refer to problem 6-7): Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity $ $ $ $ $ $ $ Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ Projected growth rate in revenues Tax rate 2015 500 1.52% 6,000 18.18% 9,500 28.79% 16,000 48.48% 17,000 51.52% 33,000 100.00% 7,200 6,800 14,000 7,000 21,000 12,000 33,000 2015 30,000 100.00% (20,000) -66.67% 10,000 33.33% (8,000) -26.67% 2,000 6.67% (900) -3.00% 1,100 3.67% (400) -1.33% 700 2.33% 20% 40% Solution: Pro forma Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income 2016 Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total 2016 Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity Additional Short-term Debt Needed 12,000 $ 21.82% 20.61% 42.42% 21.21% 63.64% 36.36% 100.00% - = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 6-13 Solution Legend = Value given in problem Given (refer to problem 6-12): Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment Total Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity $ $ $ $ $ $ $ Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income $ $ $ $ $ 0.00% 7,200 6,800 14,000 7,000 21,000 12,000 33,000 0.00% 2015 30,000 100.00% (20,000) 10,000 (8,000) 2,000 (900) 1,100 (400) 700 Projected growth rate in revenues Tax rate 20% 40% Given (refer to problem 6-12): Pro forma Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Net Operating income Interest Expense Earnings before Taxes Taxes Net Income 2016 Balance Sheet Cash and Marketable Securities Accounts Receivable Inventories Current Assets Net Property Plant & Equipment (Note A) Total 2016 Accounts Payable Short-term Debt Current Liabilities Long-term Debt Total Liabilities Total Owners' Equity Total Liabilities and Owners' Equity Additional Short-term Debt Needed Solution: Estimated Free Cash Flow EBIT -Taxes NOPAT + Depreciation and Amortization - Increase in Operating Net Working Capital - CapEx = Free Cash Flow Note A: Depreciation expense for 2016 = 2016 $ = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output 2015 500 6,000 9,500 16,000 17,000 33,000 2,000 PROBLEM 6-14 Solution Legend Given Firm free cash flows (years 1 - 5) Cost of capital Terminal value multiple of cash flow (year 5) $ Solution a: Present value of cash flows for years 1-5 Solution b: Present value of the terminal value in year 5 Solution c: Enterprise Value = PV of interim cash flows + PV of Terminal Value 80 million 12% 5 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 8-1 Given Sale price Square footage Selling price/sq ft Time on the market $ $ Comp #1 240,000.00 $ 2,240 107.14 $ 61 days Solution a. b. c. Average price per square foot Estimated Value Solution Legend Comp #2 265,000.00 2,145 123.54 32 days 2121 Tartar Circle 3,000 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 8-2 Solution Legend Current year EPS Growth rate in EPS for next year P/E Multiple (range) Estimated Value (current EPS) Estimated Value (forward EPS) $ 2.50 20% 10 15 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 8-3 THOUGHT QUESTION a. Parry Electronics is a regional electronics wholesaler and distributor which earned $1,250,000 in EBITDA this year based on revenues of $4,000,000. The enterprise values of publicly traded firms that operate in the same industry currently are valued at 5-6 times their current EBITDA. What is your estimate of the enterprise value of Parry Electronics? If Parry is small relative to the size of the comparison firms with assets only one-tenth the size of the largest firm in the industry, how would this influence your valuation estimate? Explain. Answer: Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer req = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output THOUGHT QUESTION b. Suppose we have two companies, A and B which produce identical products using slightly different production processes. The process used by company A requires more capital equipment, which is already paid for, and can produce the the product at lower per unit costs. Now, assume that you have been asked to value Company B which is privately held and that you want to use Company A, which is publicly traded, as the basis for your valuation. Discuss how differences in the production processes of these firms affect both their multiples and discount rates. Relate your answer to the discussion of the valuation of the two office buildings discussed in the chapter. Answer: THOUGHT QUESTION c. In the tech sector, the price of an IPO is often stated as a multiple of its sales, which is then compared to the price/sales ratio of comparable firms. Why do you think that analysts use price/sales ratios in this setting rather than price/earnings ratios? Answer: Answer: The problem is that many of these firms do not have positive earnings, so sales is the best valuation metric that can be used. It should be noted that sales multiples are not particularly informative in most cases, and are only used when there are not good alternatives . PROBLEM 8-4 Given Solution Legend Per Square Foot A Building size (Sq. ft.) Rent Maintenance (fixed cost) Net Operating Income % Change in NOI Selling Price Information Sales multiple for NOI/sq. ft. Capitalization rate (1/Sales multiple) Estimated property value $ B 100 $ (23) 77 $ $ 120 $ (30) 90 $ A B ? ? ? 6 16.67% 462 $ Total Square Footage A B 80,000 90,000 8,000,000 $ 10,800,000 (1,840,000) (2,700,000) 6,160,000 $ 8,100,000 A $ 6 16.67% 36,960,000 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output B ? ? ? Solution a. Using the multiple of operating income, Building B can be valued at 6 x 8,100,000 = $48,600,000. b. Recognize that Building B has higher fixed costs (as a percentage of revenues) and therefore higher operating leverage. Per Square Foot Alternative Valuation Procedure Risk free rate Implied value of maintenance costs Implied revenue value Implied revenue multiple Implied revenue cap rate Property value/sq. ft. Implied multiple Implied cap rate A B 5.5% 5.5% Total Square Footage A B 5.5% 5.5% Building A % Change in Revenues Revenues Maintenance (fixed cost) Net Operating Income % Change in Revenues % Change in NOI Building B -20% 0% 20% -20% 0% 20% (1,840,000) (1,840,000) (1,840,000) (2,700,000) (2,700,000) (2,700,000) -20.00% 0.00% 20.00% -20.00% 0.00% 20.00% PROBLEM 8-5 Given Financial Information (Millions) Revenues EBITDA Net Income Earnings per Share Interest Bearing Debt Common Equity Total Assets O'Reilly 2,120.00 321.86 171.62 1.507 120.00 1,145.77 1,713.90 Advance $ 4,400.00 544.38 240.16 2.183 560.00 939.51 2,615.73 Auto Zone $ 5,890.00 1,130.00 562.44 7.301 1,720.00 641.16 4,401.85 0.105 43.95% 12.47% 18.50% $ 0.596 47.25% 9.42% 16.00% 2.683 49.09% 16.77% 13.00% 3,240.00 3,360.00 $ 3,040.00 3,600.00 $ 6,290.00 8,010.00 10.44 19.42 15.24 1.24 6.61 13.30 11.21 1.79 7.09 11.56 10.21 1.25 12.47% 14.98% 9.42% 25.56% 16.77% 87.72% 8.10% 123.69% 149.59% 5.46% 168.21% 278.42% 9.55% 133.81% 686.55% 14.98% 25.56% 87.72% Financial Ratios Debt to Equity Gross Margins Operating Margins Expected Growth in EPS (5 yrs) Market Valuations (Millions) Market Capitalization Enterprise Value $ Valuation Ratios Enterprise Value/EBITDA P-E Ratio (Trailing) P-E Ratio (Forward) Beta Operating Margin Return on Equity Profit Margin Asset Turnover Leverage Product Solution a. b. Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 8-6 Given Cost of goods sold/Revenues Fixed operating costs Variable operating costs/Revenues Depreciation expense Salary adjustments Annual outsourcing savings/Revenues $ $ $ Solution Legend 65% 350,000 10% 50,000 100,000 10% = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Historical Incomes Statements for Toys 'n Thing, Inc. 2014 Revenues $ 2,243,155 $ Cost of goods sold (1,458,051) Gross profits 785,104 General and Administrative Expenses* (574,316) Net Operating Income $ 210,789 $ 2013 2,001,501 $ (1,300,976) 700,525 (550,150) 150,375 $ 2012 2,115,002 (1,374,751) 740,251 (561,500) 178,751 *Includes depreciation expense of $50,000 per year. Solution a. Net Operating Income Plus: Depreciation expense EBITDA Valuation $ $ EBITDA Multiple 3 4 2014 210,789 50,000 260,789 Years 2013 $ 150,375 $ 50,000 $ 200,375 $ 2014 2012 178,751 50,000 228,751 2013 2012 2013 200,375 $ 100,000 2012 228,751 100,000 2013 2012 Average b. EBITDA Plus: Salary adjustments Plus: Outsourcing savings Adjusted EBITDA Valuation Average Asking price = 5 x 2010 Unadjusted EBITDA Estimated value after adjustments $ EBITDA Multiple 3 4 2014 260,789 100,000 2014 $ PROBLEM 8-7 Given Cost of goods sold/Revenues Fixed operating costs Variable operating costs/Revenues Depreciation expense Salary adjustments Annual outsourcing savings/Revenues Solution Legend 55.00% 250,000 10.00% 50,000 - $ $ $ $ = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Solution a. Revenues Cost of goods sold Gross profits General and Administrative Expenses* Net Operating Income *Includes depreciation expense of $50,000 per year. $ Scenario 1 1,000,000 $ Scenario 2 2,000,000 $ Scenario 3 4,000,000 $ Scenario 2 2,000,000 $ Scenario 3 4,000,000 Percentage change b. Fixed operating costs Variable operating costs/Revenues Revenues Cost of goods sold Gross profits General and Administrative Expenses* Net Operating Income *Includes depreciation expense of $50,000 per year. $ $ 50,000 30% Scenario 1 1,000,000 Percentage change Case (a), which had higher fixed costs but lower variable costs, has a higher operating leverage. This effect transaltes into a higher degree of sensitivity to changes in sales. As can be seen above, in case (a), when sales jump fro $2 million to $4 million, NOI jumps up by 156%. In case (b), the same change in sales results in only a 22% increase in NOI. Higher opertaing leverages will result in higher betas (assuming sales changes are correlated to the market). PROBLEM 8-8 Given Levered equity beta Risk free rate (10 year US Treasury bon Market risk premium Estimated earnings for 2007 Dividend payout ratio Stock price (12/07/06) 5-year growth rate estimate 1.27 5.02% 5.00% $ $ 5.69 0.026462039 dates 40.00% 86.01 10.00% Description Market Cap Sector: Industrial Goods Industry: Industrial Equipment & Components Emerson Electric Co. $34.61B Parker-Hannifin Corp. 9.81B Roper Industries Inc. 4.44B Pentair Inc. 3.23B Walter Industries Inc. 2.19B P/E 16.606 15.900 19.276 14.150 24.685 17.943 23.537 Given Return on Equity % 14.94% 18.40% 23.72% 18.16% 14.27% 11.56% 15.70% Dividend Yield % 1.48% 1.41% 2.40% 1.20% 0.50% 1.70% 0.30% Long-term Debt to Price to Equity Book Value 0.87 50.471 0.649 10.11 0.494 4.257 0.308 2.298 0.603 3.122 0.485 1.974 4.036 2.731 Net Profit Price To Free Margin Cash Flow 5.40% 75.481 7.90% -134.900 9.54% 65.156 8.25% 34.392 11.89% 232.735 4.48% 147.667 7.38% -10.682 Solution Legend a. = Value given in problem Emerson Comparison to Industry = Formula/Calculation/Analysis required P/E ROE Dividend Yield LTD to Equity = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Price to Book Net Profit Margin Price to Cash Flow b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price c. Imputed growth rate using projected dividends Impute growth rate using historical dividend yields PROBLEM 8-9 Given Beta Dividend payout ratio EPS for 2007 Stock Price (12/07/06) Anticipated growth rate in EPS (5 years) Description Sector: Technology Industry: Semiconductor - Broad Line Intel Corp. Texas Instruments Inc. STMicroelectronics NV Advanced Micro Devices Inc. Analog Devices Inc. Maxim Integrated Products Inc. National Semiconductor Corp. 1.66 48% 1.13 20.88 12% $ $ Market Cap 5344.81B 252.89B 120.51B 44.62B 16.35B 11.79B 11.48B 10.28B 8.04B = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output P/E 27.716 19.9 17.622 11.08 24.959 21.152 22.667 23.025 18.049 Return on Dividend Yield Long-term Debt Equity % % to Equity 14.77% 1.90% 0.691 16.20% 1.30% 0.096 19.63% 1.90% 0.064 22.94% 0.50% 0.004 7.81% 0.70% 0.209 12.61% 0.00% 0.138 15.42% 1.90% NA 16.93% 1.90% NA 25.67% 0.60% 0.012 Solution Intel Comparison to Industry a. P/E ROE Dividend Yield LTD to Equity Price to Book Net Profit Margin Price to Cash Flow b. Estimated cost of equity Estimated growth rate DCF Estimate of Share Price c. Imputed growth rate d. Estimated future dividends Future growth rate Value of Intel Shares (2-stage) 2007-2011 2011 and beyond Estimated equity value Solution Legend Year Earnings 2007 $ 1.13 2008 2009 2010 2011 Dividends The growth rate in earnings that makes the value of Intel's shares $20.88 is found using Goal Seek. Price to Book Value 5.588 3.42 3.437 3.71 1.764 2.088 3.342 3.681 4.481 Net Profit Margin 10.39% 15.50% 18.72% 18.67% 8.24% 10.13% 21.48% 21.39% 22.18% Price To Free Cash Flow 55.435 193.3 121.039 -5577.55 -11.219 -58.916 311.392 NA 154.483 PROBLEM 8-10 Solution Solution Legend = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Given Solution Legend Exhibit P9-11.2 Various share prices Expected IPO share price Diluted shares outstanding (millions) Equity value (millions) Plus: net debt (millions) Enterprise value (millions) $ $ 20.00 $ 51.6 1,032.00 $ 740 $1,772 2005E reserves 2006 EBITDAX 2007 EBITDAX Free Cash Flow (FCF) $ $ $ $ 700 302 280 191 22.00 $ 51.6 1,135.20 $ 688 $1,824 24.00 $ 51.6 1,238.40 $ 637 $1,875 26.00 $ 51.6 1,341.60 $ 585 $1,927 28.00 $ 51.6 1,444.80 $ 534 $1,978 30.00 51.6 1,548.00 482 $2,030 = Value given in problem = Formula/Calculation/Analysis req = Qualitative analysis or Short answ = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output million million million million Solution Part a. Expected IPO share price Enterprise Value/2005E reserves Enterprise Value/2006 EBITDAX Enterprise Value/2007 EBITDAX Enterprise Value/FCF Part b. Part c. Industry $ 20.00 $ 22.00 $ 24.00 $ 26.00 $ 28.00 $ 30.00 Mean Median Maximum Minimum 2.83 2.95 3.39 2.05 6.33 6.40 7.96 5.12 6.96 7.15 7.94 5.90 8.68 9.77 10.62 6.08 quired wer required PROBLEM 8-12 Given Solution Legend EXHIBIT 1 Financial Information 2003 Shares Outstanding 2003 Fiscal Close Stock Price Market Capitalization Short Term Debt Long Term Debt Cash & Equivalents Short Term Investments EBITDA Net Income Calculated EPS $ $ $ $ $ $ $ $ $ Earthlink ELNK 159,399,000 10.00 1,593,990,000 900,000 349,740,000 89,088,000 218,100,000 (62,200,000) (0.39) $ $ $ $ $ $ $ $ $ Yahoo YHOO 655,602,000 45.03 29,521,758,060 750,000,000 713,539,000 595,975,000 455,300,000 237,900,000 0.36 $ $ $ $ $ $ $ $ $ eBay EBAY 646,819,000 $ 64.61 $ 41,790,975,590 $ 2,800,000 $ 124,500,000 $ 1,381,513,000 $ 340,576,000 $ 818,200,000 $ 441,800,000 $ 0.68 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Microsoft MSFT 10,800,000,000 25.64 276,912,000,000 6,438,000,000 42,610,000,000 14,656,000,000 9,993,000,000 0.93 Solution Price to Earnings Enterprise Value EBITDA multiple (25.63) $1,245,150,000 5.71 124.09 $29,558,219,060 64.92 94.59 $40,536,762,590 49.54 27.71 $270,474,000,000 18.45 Average 55.19 34.66 Part a. Google EBITDA Cash Debt Net income Shares EPS IPO proceeds $ $ $ $ $ $ 800,000,000 430,000,000 10,000,000 400,000,000 271,219,643 1.47 1,670,000,000 Earthlink Imputed IPO price per share from PE ratio Impute EV from EBITDA multiples Owner's equity Impute IPO price per share Part b. Part c. Yahoo eBay Microsoft Average PROBLEM 8-13 Given Exhibit P6-11.1 Income Statement and Balance Sheet values are in Thousands XTO Energy Chesapeake Energy Ticker PERIOD ENDING Income Statement ($000) Total Revenue Cost of revenue Gross Profit Operating Expenses Selling, general, and administrative Depreciation, depleletion, and amortization Others Operating income or loss Income from Continuing Operations Total other income/expenses (net) Earnings before interest and taxes Interest expense Income before tax Income tax expense Net income from continuing operations Nonrecurring Events Effect of accounting changes Net income Preferred stock and other adjustments Net income applicable to common shares Balance Sheet ($000) Assets Current Assets Cash and cash equivalents Short-term investments Net receivables Inventory Other current assets Total current assets Long-term investments Property, plant, and equipment Goodwill Other assets Deferred long-term asset charges Total assets Liabilities Current Liabilities Accounts payable Short/Current long-term debt Other current liabilities Total current liabilities Long-term debt Other liabilities Deferred long-term liability charges Total Liabilities Stockholders' Equity Preferred stock Common stock Retained earnings Treasury stock Capital surplus Other stockholders' equity Total stockholders' equity Total liabilities and stockholders' equity Other Financial Data Exploration expenses (thousands) Shares Outstanding (millions) Year-end 2004 Closing Price Market Capitalization (millions) Devon Energy Apache Burlington Resources XTO 31-Dec-04 CHK 31-Dec-04 DVN 31-Dec-04 APA 31-Dec-04 2,709,268 204,821 2,504,447 9,189,000 1,535,000 7,654,000 5,332,577 946,639 4,385,938 5,618,000 1,040,000 4,578,000 165,092 414,341 11,880 919,290 896,290 615,822 992,335 1,616,000 2,334,000 3,704,000 173,194 1,270,683 162,493 2,779,568 215,000 1,137,000 640,000 2,586,000 919,290 93,661 825,629 317,738 507,891 (20,081) 972,254 167,328 804,926 289,771 515,155 64,000 3,768,000 475,000 3,293,000 1,107,000 2,186,000 857 2,780,425 117,342 2,663,083 993,012 1,670,071 2,586,000 282,000 2,304,000 777,000 1,527,000 507,882 507,882 515,155 515,155 2,186,000 (10,000) 2,176,000 (1,317) 1,668,754 (5,680) 1,663,074 1,527,000 1,527,000 9,700 14,713 364,836 47,716 436,965 5,624,378 49,029 6,110,372 6,896 51,061 477,436 32,147 567,540 136,912 7,444,384 95,673 8,244,509 1,152,000 968,000 1,320,000 - 143,000 3,583,000 753,000 19,346,000 5,637,000 417,000 29,736,000 111,093 1,022,625 157,293 57,771 1,348,782 13,860,359 189,252 104,087 15,502,480 2,179,000 994,000 124,000 158,000 3,455,000 11,033,000 1,054,000 202,000 15,744,000 425,173 75,534 259 500,966 2,053,911 199,753 756,369 3,510,999 872,539 91,414 963,953 3,076,405 107,395 933,873 5,081,626 1,722,000 1,378,000 3,100,000 7,796,000 366,000 4,800,000 16,062,000 1,158,131 21,273 103,487 1,282,891 2,619,807 1,022,880 2,372,481 7,298,059 1,182,000 2,000 415,000 1,599,000 3,887,000 851,000 2,396,000 8,733,000 3,484 1,239,553 (24,917) 1,410,135 (28,882) 2,599,373 6,110,372 490,906 3,169 262,987 (22,091) 2,440,105 (12,193) 3,162,883 8,244,509 1,000 48,000 3,693,000 9,087,000 845,000 13,674,000 29,736,000 98,387 209,320 4,017,339 (97,325) 4,106,182 (129,482) 4,098,239 11,396,298 5,000 4,163,000 (2,208,000) 3,973,000 1,078,000 7,011,000 15,744,000 599,500 332.9 $ 35.38 $ 11,778.00 184,300 253.2 16.50 4,177.80 279,000 482.0 $ 38.92 $ 18,759.44 2,300,000 327.5 $ 50.57 $ 16,561.68 258,0