# 1. Calculatethepershare valueofABCfirmusingthefollowing information: Year 0salespershare is 75$ Salesgrowatarateof10% annuallyfor3yearsand5%annuallythereafter. Netprofitmargin is15% ofsales forever Netinvestmentinfixedcapital(netofdepreciation)is40%ofthesalesincrease AnnualincreaseinWCis30%ofthesales increase Debt financingis60%of the...

## Question:

**1. Calculate the per share value of ABC firm using the following information:**

- Year 0 sales per share is 75$
- Sales grow at a rate of 10% annually for 3 years and 5% annually thereafter.
- Net profit margin is 15% of sales for ever
- Net investment in fixed capital(net of depreciation) is 40% of the sales increase
- Annual increase in WC is 30% of the sales increase
- Debt financing is 60% of the net investments in capital equipment and working capital
- ABC beta is 1.5, risk free rate of return is 8%, equity premium is 5%

**2. Calculate the per share value of XYZ firm using the following information:**

- Year 0 EPS is $5
- EPS will increase at the following declining growth rates over the next 5 years: 35%, 20%, 15%, 11%, 9%
- Net investment in fixed capital (net of depreciation) per share are as follows:4.00, 3.50, 2.00, 1.00, 0.5
- Net investment in WC each year will be 40% of the net investment in fixed capital
- 40% of the net investment in fixed capital and WC will be financed by new debt financing
- Current market conditions dictate a risk free rate of8%, an equity risk premium of 6%, and a beta of 1.6 for XYZ

**3. The following financial statements and additional information belong to ABC Company.**

ABC's Balance Sheets(Millions of Dollars) |
2020 |
2021 | ||

Assets | ||||

Cash and equivalents | $ 160 | $ 60 | ||

Accounts receivable | 400 | 520 | ||

Inventories | 620 | 820 | ||

Total current assets | $ 1.180 | $ 1.400 | ||

Net fixed assets | $ 2.900 | $ 3.500 | ||

Total assets | $ 4.080 | $ 4.900 | ||

Liabilities and equity | ||||

Accounts payable | $ 350 | $ 350 | ||

Current portion of long term debt | 200 | 540 | ||

Total current liabilities | $ 550 | $ 890 | ||

Long-term bonds | 800 | 1.100 | ||

Total liabilities | $ 1.350 | $ 1.990 | ||

Common stock | 1.000 | 1.000 | ||

Retained earnings | 1.730 | 1.910 | ||

Total equity | $ 2.730 | $ 2.910 | ||

Total liabilities and equity | $ 4.080 | $ 4.900 | ||

ABC's Income Statement (Millions of Dollars) | ||||

2020 | 2021 | |||

Net sales | $ 5.500 | $ 6.000 | ||

Cost of goods sold (Excluding depr. & amort.) | 4.000 | 4.500 | ||

Depreciation and amortization | 290 | 320 | ||

Other operating expenses | 350 | 420 | ||

Total operating costs | $ 4.640 | $ 5.240 | ||

Earnings before interest and taxes (EBIT) | $ 860 | $ 760 | ||

Less interest | 68 | 108 | ||

Pre-tax earnings | $ 792 | $ 652 | ||

Taxes (25%) | 198 | 163 | ||

Net Income | $ 594 | $ 489 | ||

Tax rate | 25% | 25% | ||

Weighted average cost of capital (WACC) | 10,00% | 10,00% | ||

Shares outstanding (millions) | 100 | 100 |

Calculate the 2021 FCFF for ABC Company

- We assume that the FCFF is expected to grow forever at 5%, calculate the firm value
- Calculate the value of Equity knowing that the market value of debt is 1 million $.
- What is the value per share using FCFF approach?

**Related Book For**

## Cost Management A Strategic Emphasis

ISBN: 978-0078025532

6th edition

Authors: Edward Blocher, David Stout, Paul Juras, Gary Cokins

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