8) (15 points) Companies A and B are steel manufacturers Both are all equity financed They generate 50M/year of revenue for t = 1 to 10 Other than depreciation, operating costs are 20M per year Assume the appropriate discount rate is 0% Tax rate is 20% Companies A and B need to spend 50M capex each at t = 0 to buy machines for their operations A is more efficient than B A can use its machines for 10 years Uses straight line depreciation over 10 years Assume salvage value and market value of 0 at t = 10 B can use its machines for 5 years before having to replace them Uses straight line depreciation over 5 years Assume salvage value and market value of 0 at t = 5 At t = 5 they will buy other machines for 50M and similarly depreciate them over the subsequent 5 years Operations will last 10 years for both A and B Other than the above opportunities the companies have no other assets. Today is t = 0 right before any t = 0 capex.

a) For each company, what are the Earnings, EBITDA and Cash Flow for year t = 3? b) Which company, if any, should have a higher Price to Earnings ratio at t = 0? (Price is at t = 0 before capex and Earnings is t = 1 earnings.) c) Which company, if any, should have a higher Price to Cash Flow ratio at t = 0? (Price is at t = 0 before capex and Cash flow is t = 1 cash flow.)