Nike Enterprises sells widgets for $10 apiece which cost them $6 to make. In a good year (probability 50%), the company sells 150,00 widgets, and in a bad year only 100,000. The company faces fixed costs of $200,000. The company can borrow at 8% and the unlevered equity has a required rate of return of 12%. The company now has a 30% tax rate.

1. Populate a very basic Pro-forma income statement for the bad and the good year for the unlevered firm.

2. Compute the value of the unlevered firm under the perpetuity assumption.

3. Adjust the Pro-forma statements under the assumption that the firm takes on $1.25m of perpetual debt.

4. Compute the value of the levered firm and the value of the levered equity.

Answer rating: 100% (QA)

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