GIVEN-1: XYZ has annual revenue of 200, annual COGS and SG&A(combined)=100 ; The book value of PP&E=300; PP&Es useful life of 10 years.

At the end of every year, the XYZ pays out its annual free cash flows to stockholders . After 10 years the firm is liquidated at liquidation value of 0;

GIVEN-2: Assume discount rate of 10% and tax rate of 20%. Assume that IRS classifies XYZs asset as having a 15 years useful life and requires a straight line depreciation1.

Q.2.1 What is the Value of XYZ at the outset of its operation?

Q.2.2 After its free cash flows for Year 5 were paid out, calculate the Market Value of XYZs , and

• the size of the deferred tax assets on XYZs B/S?;

• the net book value of its PP&E? ;

Q.2.3 At the outset of Year 6 the tax rate was unexpectedly changed to 5%. Now calculate

• the Market Value of XYZ at the outset of Year 6 ;

• the size of cash and of deferred taxes on B/S of XYZs ?

• the net book value of its PP&E?

Q. 3 Assume that

• WLD has annual revenue=200, COGS =$160; SG&A(combined)=50 ;

• Book value of PP&E=300 ; PP&Es useful life =10.

• IRS allows only a strait line depreciation . Tax rate 20 %.

Q.3.1 What is the NI and Tax Bill of WLD

Q.3.2 . Now assume that WLD is able to reclassify $100 of COGS as CapEx . What is the NI and Tax Bill of WLD