Q1b. Find the sources of the numbers entered in B15, B16, and B17 and list them. HINT: Case Exhibit 4 lists, among other information, betas
Q1b. Find the sources of the numbers entered in B15, B16, and B17 and list them. HINT: Case Exhibit 4 lists, among other information, betas for three peers of Flash Memory. B15 is assumed, but explain what CFW says about the foibles of the 'risk premium', AKA 'equity risk premium'.
A B C D Assignment Question Q1 N 3 Answers to the questions below will be found by closely examining the case. Detective work is required. 4 If you uncover ambiguity (more than one possibility), mention both. 5 6 COMPUTE WEIGHTED AVERAGE COST OF CAPITAL 7 Formula Equation 8 COST OF DEBT 9 Coupon Rate 7.25% given 10 Marginal Tax Rate 40.0% given 11 Cost of Debt 4.35% 65*(1-b6) k-d = 1 x (1-t) 12 Weight of debt 18% given d : d+e 13 14 COST OF EQUITY 15 Risk-Free Rate 3.70% given 16 Equity Risk Premium 5.00% given R-m - R-f 17 Beta 1.20 given 18 Cost of Equity 9.72% b11+(b13*612) k-e = R-f + [B x (R-m - R-f)] 19 Weight of equity 82% 1-b8 e : d+e 20 21 Weighted-Average Cost of Capital 8.75% (b8*67)+(615*b14) (k-d x wt-d)+(k-e x wt-e)A B C D E F G H Flash Memory, Inc. Exhibit 4 Selected Financial Information for Flash Memory, Inc., and Selected Competitors, 2007 through 2009 Flash Memory, Inc. Micron Technology 2007 2008 2009 30-Apr-10 (a) 2007 2008 2009 30-Apr-10 (a) Sales ($ millions) 77 81 89 5,688 5,841 4,803 EPS ($) 1.52 0.09 1.68 -0.42 -2.10 -2.29 1.46 10 Dividend per share ($) 11 Closing stock price ($) n/a n/a n/a 7.25 2.64 10.56 9.35 12 Shares outstanding (millions) 1.492 1.492 1.492 769.1 772.5 800.7 847.6 13 Book Value per share ($) 11.43 11.52 13.20 10.08 8.00 5.81 6.61 14 ROE 13.28% 0.78% 12.75% -4.13% -26.21% -39.43% 21.00% 15 Capitalization (book value) 16 Debt 28% 34% 34% 24% 31% 40% 33% 17 Equity 72% 66% 66% 76% 69% 60% 67% 18 Beta coefficient n/a 1.25 19 20 21 SanDisk Corporation STEC, Inc. 22 23 Sales ($ millions) 3,986 3,351 3,567 189 227 354 24 EPS ($) 0.84 -8.82 1.83 3.71 0.20 0.09 1.47 1.29 25 Dividend per share ($) 26 Closing stock price ($) 33.17 9.60 28.99 39.84 8.74 4.26 16.34 13.90 27 Shares outstanding (millions) 227.7 225.3 227.4 229.3 49.8 50.0 49.4 50.3 28 Book Value per share ($) 22.64 15.27 17.18 18.13 3.72 3.63 5.65 5.48 29 ROE 3.70% -57.74% 10.63% 17.87% 5.40% 2.36% 26.06% 18.90% 30 Capitalization (book value) 31 Debt 15% 22% 21% 19% 0% 0% 0% 0% 32 Equity 85% 78% 79% 81% 100% 100% 100% 100% 33 Beta coefficient 1.36 1.00 34 35 (a) Security analyst estimates for year-end EPS $ and Return on Equity; actual data on April 30, 2010, for all other items.C30 $ )9: A B C D E F G 10 base year 11 ($0005) 2010 2011 012 2013 2014 2015 12 13 Investment in equipment -$2,200 14 Net working capital required (total from balance sheet each year) $5,648 $7,322 $7,322 $2,877 $1,308 $0 15 Investment in net working capital -$5,648 -$1,674 $0 $4,446 $1,569 $1,308 16 Sales $21,600 $28,000 $28,000 $11,000 $5,000 17 Cost of goods sold (includes depreciation) $17,064 $22,120 $22,120 $8,690 $3,950 18 Research & development $0 $0 $0 $0 $0 19 Selling, general & administrative $1,806 $2,341 $2,341 $920 $418 20 Launch promotion $300 $0 $0 $0 $0 21 Income before income taxes $2,430 $3,539 $3,539 $1,390 $632 22 Income taxes $972 $1,416 $1,416 $556 $253 23 Net income $1,458 $2,124 $2,124 $834 $379 24 Depreciation M E SE M M 25 Cash ow from operations $1,898 $2,564 $2,564 $1,274 $819 26 Total cash ow -$7,848 $225 $2,564 $7,009 $2,843 $2,127 27 Cumulative total cash flow -$7,848 -$7,624 -$5,060 $1,949 $4,792 $6,919 28 29 kmcc Enter it from previous tab 30 NET PRESENT VALUE (NPV) 31 PROFITABILITV INDEX (PI) 32 INTERNAL RATE OF RETURN (IRR) 33 34 PAYBACK PERIOD (PP) By inspection
