Question #4. Asking about Valuation with APV, FCFF, and FCFE approach

Practice Questions for Midterm Please note these are only practice questions. You are responsible for all the material that has been covered since the beginning of the semester. Question 1. Sundoes Problem Question 2. Use the Cranberry Inc. financial statements to answer the following questions: 1. Change in Net Working Capital in year 0 is...... 2. Investment in Fixed Capital is in year 0 is..... 3. FCFF in year 0 is...... 4. Net Borrowing in year 0 is..... 5. FCFE in year 0 is...... 6. Assume that FCFE computed in step 5 above is 7,000. Using the FCFE DCF technique what would be the value of the firm? 7. Assume that your answer in step 6 above is 200,000. Based on the FCFE DCF technique at what price should the stock of Cranberry Inc trade? Year -1 7,173 6,052 13,225 3,277 3,133 1,890 21,525 880 36,235 -23,375 7,378 626 21,744 43,269 Year 0 6,152 6,531 305 12,988 2,781 3,401 877 20,047 880 38,513 -24,213 7,966 -2,674 20,472 40,519 Liabilities Accounts Payable Short Term Debt Other Current Liabilities Total Current Liabilities L-T Debt Other Liabilities Deferred L-T Liability Charges Total Liabilities Stockholders' Equity Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Total Liabs and Equity Year -1 4,093 3,532 2,220 2,260 12,105 7,777 8,493 4,256 7,963 2,675 43,269 Year 0 4,701 3,368 2,187 1,920 12,176 5,779 8,326 4,029 8,476 1,733 40,519 Assets Cash And Cash Accounts Receivable Inventory Other Current Assets Total Current Assets L-T Investments Property Plant and Goodwill Intangible Assets Other Assets Total Assets Balance Sheet CRANBERRY FARMS, INC 3% 10% 10,000 Growth in Earnings Cost of Equity Shares Outstanding 200 1,077 8,329 456 7,873 1,892 5,981 305 7,877 438 7,439 1,632 5,807 300 11,199 7,252 11,774 350 8,446 Depreciation Expense 18,451 28,857 10,406 Year -1 20,570 31,944 11,374 Total Revenue Cost of Revenue Gross Profit Operating Expenses Selling General and Administrative Non Recurring Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Net Income Year 0 Income Statement Question 3: Use the financial statements and other information provided for ABC Inc. to answer the following questions. 1. Cost of equity for firm ABC is..... 2. Cost of Capital for firm ABC is..... 3. Cost of Assets (rA) for firm ABC is..... 4. P/E for firm ABC is..... 5. P/S for firm ABC is....... 6. P/B for firm ABC is..... ABC, INC Balance Sheet Total Revenue Cost of Revenue Income Statement 20,570 31,944 11,374 Year 0 18,451 28,857 10,406 Year -1 Gross Profit Operating Expenses Selling General and Administrative Non Recurring Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Net Income 11,199 7,252 Year -1 4,093 3,532 2,220 2,260 12,105 7,777 8,493 256 7,963 2,675 39,269 Other Information 11,774 350 8,446 Year 0 4,701 3,368 2,187 1,920 12,176 5,779 8,326 4,029 8,476 1,812 40,598 Year -1 1,077 8,329 456 7,873 1,892 5,981 Assets Cash And Cash Equivalents Accounts Receivable Inventory Other Current Assets Total Current Assets L-T Investments Property Plant and Equipment Goodwill Intangible Assets Other Assets Total Assets Year 0 Yield to Maturity on 10 year XYZ bond Current Stock Price Shares Outstanding be Rate on 3 month US T-bill Rate on 10 year US Treasury bond Return on the S&P 100 Return on the S&P 500 0.50% 2.10% 7.50% 7.20% 5.00% 30 2,000 1.2 305 7,877 438 7,439 1,632 5,807 Liabilities 7,173 6,052 13,225 3,277 3,133 3,890 23,525 Year -1 200 500 6,152 6,531 305 12,988 2,781 3,401 877 20,047 880 14,864 15,744 39,269 Year 0 300 1,000 880 19,671 20,551 40,598 Depreciation Dividends Accounts Payable Short Term Debt Other Current Liabilities Total Current Liabilities L-T Debt Other Liabilities Deferred L-T Liability Charges Total Liabilities Stockholders' Equity Common Stock Retained Earnings Total Stockholder Equity Total Liabs and Equity Question 4. Use the following information to answer the questions that follow. FCFE0 = $930, FCFF0 = $900, tax rate = 35%, book value of debt = $3000, cost of equity = 14%, return on assets = 10%, cost of capital = 9.5%. Debt will remain constant forever. Cash flows are expected to grow forever at 5%. (a) Using the APV approach what is the value of the firm? (b) Using the FCFF approach what is the value of the firm? (c) Using the FCFE approach what is the value of the firm? Question 5. Calculate the present value of the following stream of cash flows. The discount rate is 10% Case 1: You will receive $5000/year. Cash flows will start at year 10 and will last forever thereafter. Case 2: You will receive 10 cash flow payments starting in year 12. The first payment (at time t=12) would be $1000 and the following payments will grow at the rate of 5% every year. Case 3: The CF at t=0 is $1000. CFs grow at 12% for the first 6 years. Beyond that CFs grow at a rate of 4% forever