Hi Sarah Can you you help with problems 2.6 and 2.7? They build off the previous problems you did. For 2.6 you have to use the coverage ratio to find debt from previous year and use that to find the fcf.

Problem 2.1: A firm sells a used piece of equipment for $150,000. The equipment was originally acquired for $500,000 and is 80% depreciated for tax purposes at the time of the sale. The firm marginal tax rate is 30%. What is the after-tax cash flow produced by the sale? Answer: Given Information: Selling Price = Acquired Price = Depreciated for = Marginal Tax Rate = $150,000 $500,000 80% 30% Calculation: Sale Price Tax Basis Tax Profit Tax After-Tax Cash Flow Taxes Cash Flow $150,000 $150,000 $100,000 $50,000 $15,000 $15,000 $135,000 d for $500,000 and %. What is the Actual Forecast 2007 2008 2009 2010 -------------------------------------------------------------------(million $) 2,223.20 2,245.60 2,284.20 2,308.00 2.55% 2.57% 2.65% 2.71% 29 32.6 34.2 32.9 0.5 1.6 2.2 2.9 38.7 41.8 42.2 33.4 Sales EBITDA Margin Depreciation Increase in deffered Tax CAPEX + WC incr. Given Information: Table as per the give question. Dollar Sales = Debt = Increase in debt = Beta = Yield = Equity Risk = Micro-Cap Size Premium = EBITDA Multiplea = Corporate Tax = 3% 50% 7% 1.32 4.50% 4% 3.9% 6 38% Answer: Calculation: As per Discounted Cash Flow Approach: The Value of Fleet is calculated as follows: Weight WACC (%) Before-tax After-tax cost cost Weighted cost Debt Equity -------------------------------------------------------------------------50.00% 7.00% 4.34% 2.17% 50.00% 14.21% 14.21% 7.10% WACC 9.27% EBIT Minus taxes (38%) Plus depreciation Minus CAPEX (& WC inc.) Free cash flow PV {FCF @ 9.27%%} = Residual EBITx = 2012 market capital = PV {'2012 market capital} = 1/2008 market cap. Value = 2008 25.11 9.54 15.57 32.60 48.17 41.80 6.37 2009 26.33 10.01 16.33 34.20 50.53 42.20 8.33 2010 29.65 11.27 18.38 32.90 51.28 33.40 17.88 2011 37.11 14.10 23.01 32.00 55.01 32.50 22.51 57.33 million 6 236.48 million $151.78 million $209.11 million GCL may be able to get for Fleet before selling expenses = $209.11 Millions 2012 39.41 14.98 24.44 31.50 55.94 32.50 23.44 2011 2012 ---------------$) 2,550.00 2,616.70 2.71% 2.71% 32 31.5 2.5 2.5 32.5 32.5 Actual Forecast 2007 2008 2009 2010 -------------------------------------------------------------------(million $) 2,223.20 2,245.60 2,284.20 2,308.00 2.55% 2.57% 2.65% 2.71% 29 32.6 34.2 32.9 0.5 1.6 2.2 2.9 38.7 41.8 42.2 33.4 Sales EBITDA Margin Depreciation Increase in deffered Tax CAPEX + WC incr. Given Information: Table as per the give question. Dollar Sales = Debt = Increase in debt = Beta = Yield = Equity Risk = Micro-Cap Size Premium = EBITDA Multiplea = Corporate Tax = Answer: Calculation: WACC 3% 50% 7% 1.32 4.50% 4% 3.9% 6 38% Beta = Equity Risk Premium Risk free Rate = 0.66 4.40% 4.50% 11.30% EBIT Minus taxes (38%) Plus depreciation Minus CAPEX (& WC inc.) Free cash flow PV {FCF @ 11.30%} = Residual EBITx = 2012 market capital = PV {'2012 market capital} = 2008 25.11 9.54 15.57 32.60 48.17 41.80 6.37 53.79 6 236.47542 $138.43 2009 26.33 10.01 16.33 34.20 50.53 42.20 8.33 2010 29.65 11.27 18.38 32.90 51.28 33.40 17.88 2011 37.11 14.10 23.01 32.00 55.01 32.50 22.51 2012 39.41 14.98 24.44 31.50 55.94 32.50 23.44 1/2008 market cap. Value = $192.22 GCL may be able to get for Fleet before selling expenses = $192.22 Millions Yes. There is a change in the value. This is due to the change in the capital structure that has changed the WACC that was used for discounting the cash flow. 2011 2012 ---------------$) 2,550.00 2,616.70 2.71% 2.71% 32 31.5 2.5 2.5 32.5 32.5