Project #19965 - Finance Valuation

1)      You have been provided with three years of historical data for Tandem computers, a firm that has paid dividends.

 

1996

1997

1998

Net Income

$150

$225

$315

       

Capital Expenditures

$200

$250

$300

Depreciation

$125

$190

$250

       

Non-Cash Working Capital

$300

$330

$375

The firm started 1996 with a cash balance of $100 million, and raised 10% of its external financing needs from debt. The non-cash working capital in 1995 was $275 million. Each year the company pays out 20% of its net income as dividends.

Assuming that the firm did not buy back any stock over the period, estimate how much cash the firm would have at the end of 1998. (Assume that cash balances earn no interest and that the firm will continue to raise 10% of its external financing needs from debt)

 


1)      The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 3.25% interest compounded monthly. It deposits the first $1,500 today. If the company had wanted to deposit an equivalent lump sum today, how much would it have had to deposit? 

 

a.       $82,964.59

b.      $83,189.29

c.       $83,428.87

d.      $83,687.23

e.       $84,998.01


1)      You have been asked to estimate the value of General Communications, a telecomm firm. General Communications has a debt to capital ratio of 30%, a beta of 1.10 and a pre-tax cost of debt of 7.5%. The firm had earnings before interest and taxes of $ 600 million in 1998, after depreciation charges of $ 300 million. The firm had capital expenditures of $ 370 million, and non-cash working capital increased by $ 50 million during 1998. The firm also had a book value of capital of $ 2 billion at the beginning of 1998. (The treasury bond rate is 5%, the market risk premium is 6.3% and the firm has a tax rate of 40%). Assuming that the firm is in stable growth, and that the return on capital and reinvestment rates from 1998 can be sustained forever, estimate the value of the firm.

 

1)      You and your friends have decided to examine the potential of starting a series of restaurants in and around college campuses in Boston that cater exclusively to students. Assume that (together) you have $120,000 (equity) for this project which requires an initial investment of $200,000. The remaining amount of $ 80,000 can be raised through issuing bonds. You are given the following additional information about the project.

Year

Free Cash Flow

1

$     20,000

2

$     40,000

3

$     60,000

4

$     80,000

5

$   100,000

Other Information

 

Beta based on similar businesses

2.00

Risk Free Rate

4.50% / year

Market Risk Premium

8.00% / year

Price per Bond

$ 1,050

Face Value of Bonds

$ 1,000

Coupon Rate on Bonds

8.50 %

Coupons Paid

Monthly

Maturity of Bonds

5 years

Tax rate for firm

30%

 

Will you accept or reject this project? Why

 

 

Subject Business
Due By (Pacific Time) 12/15/2013 01:30 pm
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