You have a Pro Forma income statement partially prepared about your Division, that you manage. Next year's partial numbers are presented below, but your controller had to leave for the day so you are completing the statements.. Be sure to read the Notes on the following page. That will help you. Start with looking at Inventory Turnover to get to the Sales number. INCOME STATEMENT 2024 (PRO FORMA) SALES COGS 600,000 GROSS INCOME ADMINISTRATIVE OVERHEAD DEPRECIATION 150,000 EARNINGS BEFORE INTEREST AND TAXES (EBIT) 50,000 INTEREST EXPENSE PRETAX EARNINGS TAX (tax rate is 25\%) NET INCOME DIVIDENDS BALANCE SHEET 2024 (PRO FORMA) Cash \& Securities A/R Inventory PP\&E TOTAL ASSETS A/P NOTE/Payable (short term principal) Interest/Payable (this year, based at 7.5% ) Long Term Interest-bearing Debt Equity from 2023 Reinvested Earnings LIABILITIES AND EQUITY 200,000 150,000 100,000 1,000,000 25,000 0 500,000 500,000 1. Interest expense is based upon a 500,000 Note on a revolver with no principal repayment required, only debt service. Debt service is calculated at 7.5%. 2. Tax rate is 25%. No deferred taxes. 3. Dividend payout ratio is 25%. 4. Inventory turnover is expected to be 10x, which is the basis upon which Revenue is forecasted. This business is limited by stock out and supply availability. This business is not limited by demand. 5. 50 shares of stock currently exist. The market price per share is expected to be $25,000 per share. 6. Growth in the future is expected to be 5% indefinitely. CALCULATE THESE NUMBERS FOR NEXT YEAR: 1. SALES 2. GROSS INCOME 3. EBIT 4. INTEREST EXPENSE 5. PRETAX EARNINGS 6. TAX 7. NET INCOME 8. DIVIDENDS 9. REINVESTED EARNINGS 10. TOTAL ASSETS 11. INTEREST PAYABLE THIS YEAR 12. TOTAL EQUITY 13. TOTAL LIABILITIES AND EQUITY The next day, your controller estimates Financial Cash Flow for the upcoming year, as follows: Net Income + Depreciation - Capital Expenditures - Increases in Working Capital + Interest Expense CFFA is estimated to be 175,000 next year. This number includes cash flow due to stockholders (net income) and debtholders (interest expense). Therefore, because this cash flow is comprised of cash owed to Both Debt and Equity investors, the correct way to estimate Value of a firm or of a Division when using this number would be to discount future cash flows with the Weighted Average Cost of Capital. See below for the formula: WACC Formula =(E/VKe)+(D/V)Kd(1 Tax rate ) 1. E= Market Value of Equity. 2. V= Total market value of equity & debt. 3. Ke= Cost of Equity. 4. D= Market Value of Debt. 5. Kd= Cost of Debt. 6. Tax Rate = Corporate Tax Rate. 14. USING STOCK PRICE AND NUMBER OF SHARES OUTSTANDING, CALCULATE MARKET VALUE OF EQUITY. 15. CALCULATE THE TOTAL MARKET VALUE OF EQUITY PLUS LONG-TERM INTEREST-BEARING DEBT. 16. If the risk-free rate is 5% and the equity risk premium is 9% with a Beta of 1.5 , calculate CAPM cost of equity. 17. What is the cost of debt as listed in the Pro Formas? 18. What is the tax rate as listed in the Pro Formas? 19. Calculate the WACC (weighted average cost of capital). 20. Consider the formula for the enterprise valuation of a firm or Division: Value =CFFA/(WACC growth ) Using the formula above, calculate the enterprise value