Question 3 on please

1. Exhibit 8.18 displays the income statement and reorganized balance sheet for BrandCo, a consumer products company. Using the methodology outlined in Exhibit 8.5, determine net operating profit less adjusted taxes (NOPLAT) for years 1 to 6. Assume an operating tax rate of 30 percent. Using the methodology outlined in Exhibit 8.6, determine free cash flow for years 1 to 6. EXHIBIT 8.18 BrandCo: Income Statement and Reorganized Balance Sheet $ million Income statement Revenues Operating costs Depreciation Operating profits Today Year 1 Year 2 Year 3 Year 4 3.777.1 4,041,5 4,304.2 4.583.9 4.858.0 13,245.11 3.435.2) (3.658.5 (3.896.3] 14.130.1) (870 (103.31 (110.01 (116.5) 449.1 5092 5423 5776 6122 Year 5 Year 6 5,1262 5.382.5 14,357.31 (4.575.1) (123.01 (1292) 645.9 6782 Interest Earnings before taxes (14.01 435.1 (140) 495 2 1140) 5283 (140) 5635 1140) 5982 [14.01 6319 (14.01 6842 (1486 Taxes Net income (130.5 304.6 (1585 3698 (169.11 3945 (1795) 4187 (1896) 4423 (1992) 464.9 346 6 Reorganized balance sheet Operating working capital Property and equipment Invested capital 1889 1,510.8 18997 2021 1,616.6 1,8187 215.2 1,721.7 1,936.9 229.2 1.833.6 2.0628 242.9 1.943.6 2186.5 2563 2,050.5 269.1 2.153.0 2,422.1 2306.8 Debe Shareholders' equity Invested capital 2805 1.4192 1,699 7 2805 1,5382 1,8181 280.5 1,656.4 1.936.9 2805 1,7823 2.0628 280.5 1.906.0 21865 280.5 2,026,3 2,306.8 280.5 21416 2,422.1 Accounts payable has been netted against inventory to determine operating working capital. 2. BrandCo currently has 65.6 million shares outstanding. If BrandCo's Shares are trading at $57 per share, what is the company's market capitalization (value of equity)? Assuming the market value of debt equals today's book value of debt, what percentage of the company's value is attributable to debt, and what percentage is attributable to equity? When would the market value of debt not equal the book value? Using these weights, compute the weighted average cost of capital. Assume the pretax cost of debt is 8 percent, the cost of equity is 12 percent, and the marginal tax rate is 30 percent. 3. Using the next five years of free cash flow computed in Question 1, an esti- mated continuing value at the end of year 5, and the weighted average cost of capital computed in Question 2, estimate BrandCo's enterprise value. Assume a long-term growth rate in cash flows of 5 percent and a return on new invested capital (RONIC) of 15 percent. (BrandCo currently has no non- operating assets.) 4. Assuming the market value of debt equals today's book value of debt, what is the intrinsic equity value for BrandCo? What is the value per share? Does it differ from the share price used to determine the cost-of-capital weightings in Question 2? 5. What are the three components required to calculate economic profit? Deter- mine BrandCo's economic profit in years 1 to 6. 6. Using the economic profit for years 1 to 5 calculated in Question 5, an esti- mated continuing value at the end of year 5, and the weighted average cost of capital computed in Question 2, value BrandCo using the economic-profit- based key value driver model. Assume a long-term growth rate in cash flows of 5 percent and a RONIC of 15 percent. Should discounted economic profit be greater than, equal to, or less than discounted free cash flow? Hint: Prior- year invested capital must be used to determine ROIC and capital charge. 7. Using the information from Exhibit 8.18 and calculations from Question 1, calculate BrandCo's equity value using the cash-flow-to-equity model. How does your valuation compare with your answers in Questions 4 and 6? 8. Exhibit 8.19 displays key financial information for VidCo, an entertainment firm. Fill in the shaded areas of the exhibit to arrive at a value of the oper- ations using the adjusted present value model. Assume that the interest tax shields are as risky as the overall firm. EXHIBIT 8.19 VidCo: Key Financial Figures Smillion Discounted FCF Discounted ITS Forecast year 1 2 3 Interest Marginal tax tax shield rate, % ITSI 35.0 35.0 35.0 35.0 I 4 Prior year Interest interest debt rate. % payment 1,000.0 80 1,0400 80 1,0816 80 1,124.9 80 1,1699 80 1,218.7 80 1.2653 80 1,315.9 8.0 1,368.6 8.0 1.423 3 8.0 14802 80 FCF 100.0 105.0 110.3 115.8 121.6 127.6 1340 1407 147.7 156.1 5 6 7 B 9 10 Continuing value 350 350 350 35.0 35.0 35.0 Continuing value Sum of discounted FCF Sum of discounted ITS Marginal tax rate, 35.00 Unlevered cost of equity 10.00 PV of FCF and ITS Midyear adjustment factor Value of operations 1. Exhibit 8.18 displays the income statement and reorganized balance sheet for BrandCo, a consumer products company. Using the methodology outlined in Exhibit 8.5, determine net operating profit less adjusted taxes (NOPLAT) for years 1 to 6. Assume an operating tax rate of 30 percent. Using the methodology outlined in Exhibit 8.6, determine free cash flow for years 1 to 6. EXHIBIT 8.18 BrandCo: Income Statement and Reorganized Balance Sheet $ million Income statement Revenues Operating costs Depreciation Operating profits Today Year 1 Year 2 Year 3 Year 4 3.777.1 4,041,5 4,304.2 4.583.9 4.858.0 13,245.11 3.435.2) (3.658.5 (3.896.3] 14.130.1) (870 (103.31 (110.01 (116.5) 449.1 5092 5423 5776 6122 Year 5 Year 6 5,1262 5.382.5 14,357.31 (4.575.1) (123.01 (1292) 645.9 6782 Interest Earnings before taxes (14.01 435.1 (140) 495 2 1140) 5283 (140) 5635 1140) 5982 [14.01 6319 (14.01 6842 (1486 Taxes Net income (130.5 304.6 (1585 3698 (169.11 3945 (1795) 4187 (1896) 4423 (1992) 464.9 346 6 Reorganized balance sheet Operating working capital Property and equipment Invested capital 1889 1,510.8 18997 2021 1,616.6 1,8187 215.2 1,721.7 1,936.9 229.2 1.833.6 2.0628 242.9 1.943.6 2186.5 2563 2,050.5 269.1 2.153.0 2,422.1 2306.8 Debe Shareholders' equity Invested capital 2805 1.4192 1,699 7 2805 1,5382 1,8181 280.5 1,656.4 1.936.9 2805 1,7823 2.0628 280.5 1.906.0 21865 280.5 2,026,3 2,306.8 280.5 21416 2,422.1 Accounts payable has been netted against inventory to determine operating working capital. 2. BrandCo currently has 65.6 million shares outstanding. If BrandCo's Shares are trading at $57 per share, what is the company's market capitalization (value of equity)? Assuming the market value of debt equals today's book value of debt, what percentage of the company's value is attributable to debt, and what percentage is attributable to equity? When would the market value of debt not equal the book value? Using these weights, compute the weighted average cost of capital. Assume the pretax cost of debt is 8 percent, the cost of equity is 12 percent, and the marginal tax rate is 30 percent. 3. Using the next five years of free cash flow computed in Question 1, an esti- mated continuing value at the end of year 5, and the weighted average cost of capital computed in Question 2, estimate BrandCo's enterprise value. Assume a long-term growth rate in cash flows of 5 percent and a return on new invested capital (RONIC) of 15 percent. (BrandCo currently has no non- operating assets.) 4. Assuming the market value of debt equals today's book value of debt, what is the intrinsic equity value for BrandCo? What is the value per share? Does it differ from the share price used to determine the cost-of-capital weightings in Question 2? 5. What are the three components required to calculate economic profit? Deter- mine BrandCo's economic profit in years 1 to 6. 6. Using the economic profit for years 1 to 5 calculated in Question 5, an esti- mated continuing value at the end of year 5, and the weighted average cost of capital computed in Question 2, value BrandCo using the economic-profit- based key value driver model. Assume a long-term growth rate in cash flows of 5 percent and a RONIC of 15 percent. Should discounted economic profit be greater than, equal to, or less than discounted free cash flow? Hint: Prior- year invested capital must be used to determine ROIC and capital charge. 7. Using the information from Exhibit 8.18 and calculations from Question 1, calculate BrandCo's equity value using the cash-flow-to-equity model. How does your valuation compare with your answers in Questions 4 and 6? 8. Exhibit 8.19 displays key financial information for VidCo, an entertainment firm. Fill in the shaded areas of the exhibit to arrive at a value of the oper- ations using the adjusted present value model. Assume that the interest tax shields are as risky as the overall firm. EXHIBIT 8.19 VidCo: Key Financial Figures Smillion Discounted FCF Discounted ITS Forecast year 1 2 3 Interest Marginal tax tax shield rate, % ITSI 35.0 35.0 35.0 35.0 I 4 Prior year Interest interest debt rate. % payment 1,000.0 80 1,0400 80 1,0816 80 1,124.9 80 1,1699 80 1,218.7 80 1.2653 80 1,315.9 8.0 1,368.6 8.0 1.423 3 8.0 14802 80 FCF 100.0 105.0 110.3 115.8 121.6 127.6 1340 1407 147.7 156.1 5 6 7 B 9 10 Continuing value 350 350 350 35.0 35.0 35.0 Continuing value Sum of discounted FCF Sum of discounted ITS Marginal tax rate, 35.00 Unlevered cost of equity 10.00 PV of FCF and ITS Midyear adjustment factor Value of operations