Wok Yow Imports, Inc., is a rapidly growing, closely held corporation that imports and sells Asian style
Question:
Selected balance sheet accounts at the end of 2010 are as follows: Required cash, accounts receivable, and inventory accounts totaled $50,000; net fixed assets were $50,000; and accounts payable and accruals totaled $25,000. Each of these accounts was expected to grow with sales over time. Long-term debt was $30,000, and there were 10,000 shares of common stock outstanding at the end of 2010.
Data have been gathered for Fine Furniture Products, a comparable publicly traded firm in Wok Yows industry. Fine Furnitures risk index is judged to be 2.00, compared to a risk index of 1.00 for firms of average riskiness. Management believes that a 2.00 adjustment factor should be multiplied times the expected market risk premium for average firms to reflect Wok Yows (and Fine Furnitures) relatively greater riskiness. Wok Yows long-term debt to long-term capital (long-term debt plus equity) ratio was 40 percent at the end of 2010. The interest rate on long-term U.S. government bonds is 7 percent, Wok Yow could issue new longterm debt at a 12 percent rate, and the average expected market risk premium (common stocks over government bonds) is 7.5 percent for average firms.
A. Project Wok Yows NOPAT statements for 2011 to 2015.
B. Determine the annual increases in required net working capital and capital expenditures (CAPEX) for Wok Yow for the years 2011 to 2015.
C. Project annual operating free cash flows to the entity for the years 2011 to 2015.
D. Management initially thought that an 18 percent discount rate was reasonable.
E. Use the information from Part D to estimate Wok Yows terminal value cash flow at the end of 2014.
F. Estimate the firms enterprise or entity value at the end of 2010.
G. Adjust the enterprise value to determine Wok Yows equity value in dollars and on a per-share basis at the end of 2010.
H. Now estimate Wok Yows after-tax cost of long-term debt. Use the risk-free rate, the expected market risk premium, and the risk index for Fine Furniture Company to estimate Wok Yows cost of equity capital. Determine Wok Yows weighted average cost of capital (WACC).
I. Reestimate Wok Yows enterprise value using the WACC calculated in Part H. Then adjust the enterprise value to determine Wok Yows equity value in dollars and on a per-share basis at the end of2010.
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Step by Step Answer:
Entrepreneurial Finance
ISBN: 978-0538478151
4th edition
Authors: J . chris leach, Ronald w. melicher