Problem 1: Using the Hybrid tab in the HW7 template file (posted in the Class 18-19 folder in the Files section), determine the value of the project being modeled using a 3 year planning period and assuming that projects in this industry tend to sell for 5.5x EBITDA in the hybrid model. Note that the $600,000 is all CAPEX and makes up the majority of your initial investment (the rest is working capital). Assume a 3 year life for the assets you bought and use straight line depreciation. Based on your calculated NPV with a WACC of 9.5%, is this project/firm a good investment? Explain why or why not.

Problem 2: Chapter 9, problems 9.4 and 9.6. You don't have to use the template to work the problems, but I HIGHLY recommend it. Hint: fill in the yellow cells and assume that the drivers in the template are correct ... the stock price at the end of both problems should be identical to the third decimal point.

PLEASE fill in excel document and send back as an excel document! Thank you

Given: EBIT 2010 EBIT growth Initial Investment in Assets (CAPEX) Initial WC Incremental WC/year Asset Lifetime Taxes WACC $110,000 5.0% $600,000 $15,000 $1,500 3 30% 9.50% Planning Period 2010 EBIT - Taxes NOPAT + Depreciation - CAPEX - Increase in WC PFCF Terminal Value Project Value 2011 Planning Period 2012 2013 Assumptions Sales growth for years 1-4 Gross profit margin Operating expense (excluding depreciation) to sales ratio Current assets to sales ratio Accruals and Payables to sales ratio Net working capital to sales ratio Average depreciable life of PP&E in year 0 Depreciable life of new PP&E Property, plant and equipment to sales ratio Initial sales in year 0 Corporate income tax rate Total liabilities (debt) in year 0 No. of shares outstanding (000) Debt beta Borrowing rate (before tax) Unlevered equity beta Levered equity beta Market Risk Premium Risk free rate Levered equity cost of capital $ $ 0.0% 60.0% 30.0% 15.0% 5.0% 10.0% 5 10 40.0% 100,000.00 30.0% 25,000.00 2000 0.20 8% 1.38 1.60 5% 7% 15.0% Problem 9-4: Traditional WACC Valuation of Canton Corp. a. What is Canton's cost of equity capital? What is the after-tax cost of debt for the firm? After-tax cost of debt Levered cost of equity b. Calculate the equity free cash flows for Canton for each of the next four years. Sales Operating income (Earnings Before Interest and Taxes) Less: Cash tax payments Net operating profits after taxes (NOPAT) Plus: Depreciation expense Less: Investments in Net Working Capital in new Capital (CAPEX) $ $ $ $ $ $ $ 1 100,000.00 22,000.00 (6,600.00) 15,400.00 8,000.00 $ $ $ $ $ $ (8,000.00) $ Years 2 100,000.00 $ 22,000.00 $ (6,600.00) $ 15,400.00 $ 8,000.00 $ - $ (8,000.00) $ 3 100,000.00 22,000.00 (6,600.00) 15,400.00 8,000.00 $ $ $ $ $ 4 100,000.00 22,000.00 (6,600.00) 15,400.00 8,000.00 - $ (8,000.00) $ (8,000.00) Total net investment for the period Firm free cash flow (FCF) Equity Free Cash Flow Calculation (Firm) Free Cash Flow Less: Interest (1 - Tax Rate) $ $ $ (8,000.00) $ (8,000.00) $ (8,000.00) $ (8,000.00) 1 2 3 4 $ (1,400.00) $ - $ (1,400.00) $ - $ (1,400.00) $ (1,400.00) $ 25,000.00 Debt Valuation Present Value of Debt Equity Valuation Present value of EFCFs for Years 1-4 Present value of EFCFs for Years 5 and beyond Equity Value $ Enterprise Value = Debt value + Equity value $ c. Using the market values of Canton's debt and equity and the after-tax cost of capital calaulate its WACC. Market Value Proportion After-Tax Cost Long-term Debt Equity Total $ WACC = 25,000.00 Product d. What are the firm free cash flows for Canton for years 1-4? 1 2 3 4 e. Estimate the enterprise value of Canton using the Traditional WACC method. Present value of firm free cash flows: Planning horizon (4 years) PV of Terminal Value In year 4 Enterprise Value = Value of invested capital f. What is the value per share of equity for Canton? Enterprise Value Less: Debt Equals: Shareholder value No. of shares (000) 25,000.00 2,000 Value per share Problem 9.6: APV Valuation of Canton Corp. a. What is the firm's unlevered cost of equity? Unlevered equity beta Unlevered cost of equity b. What are the unlevered equity free cash flows for Canton for years 1 through 4? Year 1 2 1 2 3 4 3 4 Unlevered equity free cash flows = FCFs c. What are the interest tax savings for Canton for years 1 through 4? Year d. What is Canton's enterprise value? Valuing the unlevered cash flows Planning period PV of Terminal value Total Unlevered Value Valuing the interest tax savings Planning period PV of Terminal value Total Tax Savings Enterprise Value = Value of the unlevered firm + Value of interest tax savings e. What is the value per share for Canton's equity? Enterprise Value Less: Debt Equity Value Value per share (2 million shares) (25,000.00)