hw16 fig 9.10

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No. 12

Finance 305, FALL 2012

HW 16

Page _FIRM AND PROJECT VALUATION Five Equivalent Methods

Inputs

Valuation Object 2Date 0 Proj Investment or Firm Cap $360.00Tax Rate 40.0%

Unlevered Cost of Equity Capital 10.0%Riskfree Rate=Cost of Riskfree Debt 3.0%Inf Horiz Growth Rate of Unlev Equity 5.0%

Include Infinite Horizon? 2

Cash Flows 2nd Stage:

Infin Horiz

Date 0 1 2 3 4 5 6Revenues $550.00 $590.00 $620.00 $655.00 $675.00 $0.00Expenses $410.00 $435.00 $445.00 $470.00 $470.00 $0.00

Gross Earnings $140.00 $155.00 $175.00 $185.00 $205.00 $0.00Depreciation $60.00 $60.00 $60.00 $60.00 $60.00 $0.00Earnings Bef Interest & Tax (EBIT) $80.00 $95.00 $115.00 $125.00 $145.00 $0.00Interest Expense $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Earnings Before Tax $80.00 $95.00 $115.00 $125.00 $145.00 $0.00Taxes $32.00 $38.00 $46.00 $50.00 $58.00 $0.00Earnings $48.00 $57.00 $69.00 $75.00 $87.00 $0.00Add Back Depreciation $60.00 $60.00 $60.00 $60.00 $60.00 $0.00

Cash Flow from Operations $108.00 $117.00 $129.00 $135.00 $147.00 $0.00

New Invest in Plant and Equipment $0.00 $0.00 $0.00 $0.00 $0.00 $0.00After-Tax Salvage Value $300.00

New Invest in Working Capital $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Cash Flows from Investments $0.00 $0.00 $0.00 $0.00 $300.00 $0.00

New Borrowing (Repayment) $0.00 $0.00 $0.00 $0.00 $0.00

Free Cash Flow to Equity (FCFE) $108.00 $117.00 $129.00 $135.00 $447.00 $0.00

First Stage: Finite Horizon

Firm Project

Valuation O

bject

Yes No

Infinite Horiz

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Page _= Dividends $108.00 $117.00 $129.00 $135.00 $447.00 $0.00

Interest $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Less New Borrowing (Repayment) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Cash Flow to Debtholders (CFD) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Tax Shield Benefit $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Free Cash Flow to the Firm (FCFF) $108.00 $117.00 $129.00 $135.00 $447.00 $0.00

Alternative Way to get FCFF

Earnings $48.00 $57.00 $69.00 $75.00 $87.00 $0.00After-tax Interest Expense $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Net Oper. Profit After Tax (NOPAT) $48.00 $57.00 $69.00 $75.00 $87.00 $0.00Depreciation $60.00 $60.00 $60.00 $60.00 $60.00 $0.00Cash Flows from Investments $0.00 $0.00 $0.00 $0.00 $300.00 $0.00


Debt (D) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Book Value of Equity $360.00 $300.00 $240.00 $180.00 $120.00 $60.00

Economic Profit

Net Oper. Profit After Tax (NOPAT) $48.00 $57.00 $69.00 $75.00 $87.00 $0.00Capital Charge $36.00 $34.00 $32.00 $30.00 $28.00 $0.00Economic Profit $12.00 $23.00 $37.00 $45.00 $59.00 $0.00

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(1.) Adjusted Present Value (APV) 2nd Stage:

Infin Horiz

Date 0 1 2 3 4 5 6


Value of the Unlevered Firm $509.92 $492.90 $465.21 $422.73 $370.00 $0.00Tax Shield Benefit $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Value of the Tax Shield Benefit $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Value of Fut Cash Flows (APV Met) $509.92

- Date 0 Project Investment $360.00

NPV of Project (APV Method) $149.92


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(2) Free Cash Flow to Equity (FCFE) 2nd Stage:

Infin Horiz

Date 0 1 2 3 4 5 6Inf Horiz Growth Rate of Lev Equity 0.0%Debt + Equity (D+E) $509.92 $492.90 $465.21 $422.73 $370.00 $0.00Equity (E) $509.92 $492.90 $465.21 $422.73 $370.00 $0.00Levered Cost of Equity Capital 10.0% 10.0% 10.0% 10.0% 10.0% 0.0%

Free Cash Flow to Equity (FCFE) $68.00 $77.00 $89.00 $95.00 $407.00 $0.00Value of Equity (E) $509.92 $492.92 $465.21 $422.73 $370.00 $0.00Cash Flow to Debtholders (CFD) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Value of Debt (D) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Value of Fut Cash Flows (FCFE Met) $509.92- Date 0 Project Investment $360.00NPV of Project (FCFE Method) $149.92


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(3) Free Cash Flow to the Firm (FCFF) 2nd Stage:

Infin Horiz

Date 0 1 2 3 4 5 6

Inf Horiz Growth Rate of the Firm 5.0%Equity Weight (E / (D+E)) 100.0% 100.0% 100.0% 100.0% 100.0% 0.0%Debt Weight (D / (D+E)) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Cost of Firm Capital (WACC) 10.00% 10.00% 10.00% 10.00% 10.00% 5.0%

Free Cash Flow to the Firm (FCFF) $68.00 $77.00 $89.00 $95.00 $407.00 $0.00Value of Fut Cash Flows (FCFF Met) $509.92 $492.92 $465.21 $422.73 $370.00 $0.00- Date 0 Project Investment $360.00NPV of Project (FCFF Method) $149.92


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(4) Dividend Discount Model (DDM) 2nd Stage:

Infin Horiz

Year 0 1 2 3 4 5 6Dividend $68.00 $117.00 $129.00 $135.00 $447.00 $0.00Value of Equity (E) $509.92 $492.92 $465.21 $422.73 $370.00 $0.00Cash Flow to Debtholders (CFD) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Value of Debt (D) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00Value of Fut Cash Flows (DDM Met) $509.92- Date 0 Project Investment $360.00NPV of Project (DDM Method) $149.92

(5) Residual Income (RI) - Incomplete* 2nd Stage:

Infin Horiz

Year 0 1 2 3 4 5 6Economic Profit $12.00 $23.00 $37.00 $45.00 $59.00 $0.00Economic Profit on Salvage Value $40.00Value of the Economic Profit $149.92 $152.92 $145.21 $122.73 $90.00 $0.00+ Date 0 Book Value of the Firm $360.00Value of Fut Cash Flows (RI Met) $509.92



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Page _- Date 0 Project Investment $360.00

NPV of Project (RI Method) $149.92

* I am looking for the change(s) required so that Residual Income valuation matches the valuation from the

other four methods: (1) when there is positive debt, (2) when there are positive infinite horizon cash flows,

and (3) when the infinite horizon growth rate is positive. Please email one or more of the required changes

to [email protected] and be acknowledged in the 4th Edition!

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hw16 fig 9.10

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