Question 6 Show work for a,b,c,d,e and f.

ABCs earnings before interest taxes (EBIT) was $900,000 and depreciation was $100,000 in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 20% of pretax cash flow (i.e., EBIT + Depreciation) each year. The tax rate is 35%. The appropriate market capitalization rate for the unleveraged cash flow is 10% per year (i.e., cost of capital k_a = .10), and the firm currently has debt of $2 million outstanding. Ignore ABCs interest expenses, change in debts, and change in net working capital.

(a) Given ABCs next year EBIT of $945,000 and interest expenses of $0, the taxable income will be $945,000. Given the tax rate of 35%, compute the tax amount in the coming year.

(b) Given ABCs next year EBIT of $945,000, depreciation of $105,000 and taxes computed in part (a), compute the operating cash flow (OCF) in the coming year using the formula: OCF = EBIT + Deprecation Taxes in the coming year.

(c) Given ABCs next year EBIT of $945,000 and depreciation of $105,000, its capital expenditure will be $210,000. What is the free cash flow for the firm (FCFF) in the coming year if NWC is zero? (FCFF = OCF Capital expenditure NWC).

(d) Use the free cash flow approach to compute the firm value.

(e) Given the firm value computed in part (d) and the value of debt outstanding of $2 million, compute the equity value in the coming year. (Equity value = firm value debt value)

(f) If there are 6 million shares of common stocks outstanding. What is the stock price per share? (P₀ = equity value / number of shares outstanding)