Firebird's current EBIT is 1,963, and its current interest expense is 650. It has a current...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Firebird's current EBIT is 1,963, and its current interest expense is 650. It has a current capital spending of 146 and a current depreciation and amortization of 28. The effective tax rate and marginal tax rate for Firebird happens to be the same, which is 26.50%. For the current year, Firebird has inventories of 11, accounts receivable of 179, accounts payable of 4, a book value of debt of 2,672, a book value of equity of 11,596, a cash and marketable securities value of 4,696, and a non-cash operating assets value of 10,443. For the previous year-end, Firebird has inventories of 24, accounts receivable of 58, accounts payable of 1, a book value of debt of 2,667, a book value of equity of 11,392, a cash and marketable securities value of 4,225, and a non-operating assets value of 10,497. Firebird is currently being traded on NYSE and its most recent stock price is $49.73 per share. One U.S. dollar is now worth 1.33 Canadian dollars. It currently has 767 million common shares outstanding. The firm has some preferred shares outstanding, and its aggregated market value is calculated to be 2,500. The firm has no convertible debts outstanding at the moment. The current nominal 10 year Treasury bond quarterly yield to maturity is 0.5975%, and your team decides to use the annual percentage rate instead of the annual effective rate. Canada currently has an inflation rate of 1.42%. Your team members believe in precise nominal risk free rate rather than the Fisher Effect. Based on the firm's interest rate coverage ratio and your analysis on the rating of the company's notes, you found the company default spread to be 1.87%. The Canadian and the U.S. equity risk premium are the same and equals to 5.04%. China currently has a country default spread of 0.76%. The standard deviation in the Shanghai Composite Stock Market Index is 33.75% and the standard deviation in Chinese government bond is 30.00%. Firebird gets 47.86% of its revenues in the U.S., 23.43% of its revenue in Canada and the rest of its revenue from China. However, you fail to acquire the percentage revenue the average Canadian firm gets in Canada. Your team went through votes and 4 out of 6 are supporting the operation based beta exposure approach for the cost of equity. One of your teammate did an excellent job on estimating the bottom-up beta, and the estimated value of the unlevered beta is 0.75 for the current year. Your teammates estimated the current ROC to increase about 15.00% next year based on the trend analysis from the last 5 years. Based on the qualitative analysis, you decided to use a three-stage DCF model and a high growth period of 5 years for Firebird. The growth rate will remain its value during the first year of the high growth period and gradually transit to the growth rate in the stable growth period during the following years in the high growth period. In the stable growth period, you estimated the ROC to be 2% higher than the wace in the stable growth period. The growth rate in the stable growth period is set to be 1% higher than the current long term risk free rate, and you need to compute the wace in the stable growth period. You consider three aspects when calculating the wacc: firstly, have the beta set to 1; secondly, take the average of the debt to equity ratio of your firm and the industry average debt to equity ratio, which is 0.35 for the video game industry here, use the average of these two ratios as your debt ratios in the stable growth period. Thirdly, consider the emerging market country risk premium shrink to half of its current size in the stable growth period. Your team is assuming the growth rate and the cost of capital to gradually change to the stable growth rate and stable cost of capital, respectively, in a straight line fashion. While calculating the market value of debt, the pretax cost of debt is assumed to be fixed across the years. Your team decided to ignore the short- term debt, and you estimated that the firm has a 5-year average maturity of debt. In addition, you decided to do no adjustment on the market value of equity. Last but not the least, your team decided to capitalize the R&D expenses and convert the operating lease expenses to debt. The current R&D expense is 1,148. You estimated a 3-year amortizable life for the R&D, and the R&D expenses one year ago to 3 years ago are 1,103, 1,008, and 676, respectively. You assumed that R&D expenses are spent at the end of each year. The current operating lease expense is 39. You estimated a 6-year life for the operating lease assets, and the future commitments from year one to year six are 56, 67, 51, 46, 38, and 60, respectively. You decided to use a straight line depreciation method for both R&D and operating lease expenses. After a sip of water (sorry, no coffee) and with a bitter smile on your face, you begin the many hours journey of calculating the intrinsic value for Firebird: a) What is the current year FCFF (FCFF0) for Firebird? b) What is the current year weighted average cost of capital (wacc0) for Firebird? c) What is the terminal value at the end of the high growth period? d) What is the firm value now according to your fundamental analysis? e) Is Firebird overvalued or undervalued? By how much in percentage? Firebird's current EBIT is 1,963, and its current interest expense is 650. It has a current capital spending of 146 and a current depreciation and amortization of 28. The effective tax rate and marginal tax rate for Firebird happens to be the same, which is 26.50%. For the current year, Firebird has inventories of 11, accounts receivable of 179, accounts payable of 4, a book value of debt of 2,672, a book value of equity of 11,596, a cash and marketable securities value of 4,696, and a non-cash operating assets value of 10,443. For the previous year-end, Firebird has inventories of 24, accounts receivable of 58, accounts payable of 1, a book value of debt of 2,667, a book value of equity of 11,392, a cash and marketable securities value of 4,225, and a non-operating assets value of 10,497. Firebird is currently being traded on NYSE and its most recent stock price is $49.73 per share. One U.S. dollar is now worth 1.33 Canadian dollars. It currently has 767 million common shares outstanding. The firm has some preferred shares outstanding, and its aggregated market value is calculated to be 2,500. The firm has no convertible debts outstanding at the moment. The current nominal 10 year Treasury bond quarterly yield to maturity is 0.5975%, and your team decides to use the annual percentage rate instead of the annual effective rate. Canada currently has an inflation rate of 1.42%. Your team members believe in precise nominal risk free rate rather than the Fisher Effect. Based on the firm's interest rate coverage ratio and your analysis on the rating of the company's notes, you found the company default spread to be 1.87%. The Canadian and the U.S. equity risk premium are the same and equals to 5.04%. China currently has a country default spread of 0.76%. The standard deviation in the Shanghai Composite Stock Market Index is 33.75% and the standard deviation in Chinese government bond is 30.00%. Firebird gets 47.86% of its revenues in the U.S., 23.43% of its revenue in Canada and the rest of its revenue from China. However, you fail to acquire the percentage revenue the average Canadian firm gets in Canada. Your team went through votes and 4 out of 6 are supporting the operation based beta exposure approach for the cost of equity. One of your teammate did an excellent job on estimating the bottom-up beta, and the estimated value of the unlevered beta is 0.75 for the current year. Your teammates estimated the current ROC to increase about 15.00% next year based on the trend analysis from the last 5 years. Based on the qualitative analysis, you decided to use a three-stage DCF model and a high growth period of 5 years for Firebird. The growth rate will remain its value during the first year of the high growth period and gradually transit to the growth rate in the stable growth period during the following years in the high growth period. In the stable growth period, you estimated the ROC to be 2% higher than the wace in the stable growth period. The growth rate in the stable growth period is set to be 1% higher than the current long term risk free rate, and you need to compute the wace in the stable growth period. You consider three aspects when calculating the wacc: firstly, have the beta set to 1; secondly, take the average of the debt to equity ratio of your firm and the industry average debt to equity ratio, which is 0.35 for the video game industry here, use the average of these two ratios as your debt ratios in the stable growth period. Thirdly, consider the emerging market country risk premium shrink to half of its current size in the stable growth period. Your team is assuming the growth rate and the cost of capital to gradually change to the stable growth rate and stable cost of capital, respectively, in a straight line fashion. While calculating the market value of debt, the pretax cost of debt is assumed to be fixed across the years. Your team decided to ignore the short- term debt, and you estimated that the firm has a 5-year average maturity of debt. In addition, you decided to do no adjustment on the market value of equity. Last but not the least, your team decided to capitalize the R&D expenses and convert the operating lease expenses to debt. The current R&D expense is 1,148. You estimated a 3-year amortizable life for the R&D, and the R&D expenses one year ago to 3 years ago are 1,103, 1,008, and 676, respectively. You assumed that R&D expenses are spent at the end of each year. The current operating lease expense is 39. You estimated a 6-year life for the operating lease assets, and the future commitments from year one to year six are 56, 67, 51, 46, 38, and 60, respectively. You decided to use a straight line depreciation method for both R&D and operating lease expenses. After a sip of water (sorry, no coffee) and with a bitter smile on your face, you begin the many hours journey of calculating the intrinsic value for Firebird: a) What is the current year FCFF (FCFF0) for Firebird? b) What is the current year weighted average cost of capital (wacc0) for Firebird? c) What is the terminal value at the end of the high growth period? d) What is the firm value now according to your fundamental analysis? e) Is Firebird overvalued or undervalued? By how much in percentage?
Expert Answer:
Answer rating: 100% (QA)
a Current Year FCFF FCFF0 for Firebird NetWorkingCapital Current YearPrevious Year Accounts Receivab... View the full answer
Related Book For
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon
Posted Date:
Students also viewed these accounting questions
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Starting with acetylene as your only source of carbon atoms, identify how you would prepare each member of the following homologous series of aldehydes: a. Ethanal b. Propanal c. Butanal d. Pentanal
-
Jerry Hasbrow, a sales representative for Penn Office Supplies Company, is compensated on a commission basis and receives a substantial bonus if he meets his annual sales goal. The companys...
-
The following are the end-of-month prices for both Hong Kongs Hang Seng Index and Sun Hung Kai Properties Ltd.s common stock. a. Using the data here, calculate the holding-period returns for each of...
-
Table B. 14 presents data on the transient points of an electronic inverter. Use all possible regressions and the \(C_{p}\) criterion to find an appropriate regression model for these data....
-
1. To what extent do the three people featured in this case study manage their own emotions on the job? How do they accomplish this? To what extent do you think they effectively manage emotions under...
-
The one year interest rate over the next ten years will be: 5%, 6%, 7%, 8.5%, 9.5%, 10%, 10.5%, 11%, 12%, and 13%. Using the expectations theory, what will be the interest rates on a two -year bond,...
-
You are discussing your 401(k) with Dan Ervin when he mentions that Sarah Brown, a representative from Bledsoe Financial Services, is visiting East Coast Yachts today. You decide that you should meet...
-
1. The Colorado Copper Company sponsors a defined benefit pension plan. The following information pertains to that plan: Projected benefit obligation at Jan. 1, 2013 S144 million Service cost 2013 36...
-
a) Consider a tiny economy of Country A which currently has a total output of $400 million, investment of $50 million and a multiplier of 2. The equilibrium equation for Fraser Island is represented...
-
Michael, a prior client, presents a Form W - 2 with more than one box 1 2 code. LaAdd up the amounts and report the total.Report only the value of the code from last year's tax return.Report only the...
-
The following table is entitled Advertising Spend and Revenues for Cola Companies in Country X (2022) and contains information on advertising spend and annual revenues for the top 5 cola companies in...
-
On April 30, 2024, Jarred Inc. issued 10,000 shares at $1.30 per share. After the share issuance, how many outstanding common shares would Jarred Inc. have and what would be Jarred Inc.'s common...
-
What protections do Green Credit, as the creditor, and its customers, as debtors, have in a credit relationship?
-
There is an expected payment thirty years from today of$9,000,000 and interest rates for the thirty-year period are yielding 4%, what is the present value for the future payment? 2)a)A bank wants to...
-
Suppose you need to answer any four of seven essay questions on a history test and you can answer them in any order. a. How many different question combinations are possible? b. What is the...
-
On January 1, 2014, Wade Crimbring, Inc., a dealer in used manufacturing equipment, sold a CNC milling machine to Fletcher Bros., a new business that plans to fabricate utility trailers. To conserve...
-
On December 31, 2014, Ball Company leased a machine from Cook for a 10-year period, expiring December 30, 2024. Annual payments of $100,000 are due on December 31. The first payment was made on...
-
For the month of December 2014, Ranger Corporations records show the following information: Cash received on accounts receivable $35,000 Cash sales 30,000 Accounts receivable, December 1, 2014 80,000...
-
A 1.0-cm-diameter sphere is charged to a potential of \(3400 \mathrm{~V}\). How much charge is on the sphere?
-
a. What is the potential difference between the terminals of an ordinary AA or AAA battery? (If you're not sure, find one and look at the label.) b. An AA battery is connected to a parallel-plate...
-
\(\mathrm{A}+25 \mathrm{nC}\) charge is at the origin. How much farther from the charge is the \(2000 \mathrm{~V}\) equipotential surface than the \(3000 \mathrm{~V}\) surface?
Study smarter with the SolutionInn App