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16) Compute the value of a irm with free cash lows of $4,000, $4,500, and $5,000 over the
next three years, a terminal irm value of $60,000 after three years, and the unlevered cost
of capital is 10%. Assume that the interest rate tax shield is zero.
A) $56,191
B) $57,234
C) $58,098
D) $59,123
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
17) Compute the value of a irm with free cash lows of $1,000, $2,500, and $3,000 over the
next three years, a terminal irm value of $40,000 after three years, and the unlevered cost
of capital is 15%. Assume that the interest rate tax shield is zero.
A) $26,191
B) $27,234
C) $31,033
D) $39,343
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
30
18) Compute the value of a irm with free cash lows of $9,000, $7,000, and $5,000 over the
next three years, a terminal irm value of $30,000 after three years, and the unlevered cost
of capital is 10%. Assume that the interest rate tax shield is zero.
A) $36,109
B) $37,098
C) $38,745
D) $40,263
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
19) A irm has interest expense of $6,500 each year for ten years. If the tax rate is 35% and
the discount rate is 6%, compute the value of the interest rate tax shield.
A) $16,744
B) $16,424
C) $16,578
D) $16,987
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
31
20) A irm has interest expense of $2,500 each year for ten years. If the tax rate is 30% and
the discount rate is 7%, compute the value of the interest rate tax shield.
A) $5,744
B) $5,918
C) $5,268
D) $6,987
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
21) A irm has interest expense of $3,500 each year for ten years. If the tax rate is 35% and
the discount rate is 8%, compute the value of the interest rate tax shield.
A) $7,091
B) $7,514
C) $8,220
D) $8,716
AACSB Objective: Analytic Skills
Author: KB
Question Status: Previous Edition
32
Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2010-2015
Year 2010 2011 2012 2013 2014 2015
Income Statement ($ 000)
1 Sales 75,000 88,358 103,234 119,777 138,149 158,526
2 Cost of Goods Sold
3 Raw Materials
(16,000
) (18,665) (21,593) (24,808) (28,333) (32,193)
4 Direct Labor Costs
(18,000
) (21,622) (25,757) (30,471) (35,834) (41,925)
5 Gross Proit 41,000 48,071 55,883 64,498 73,982 84,407
6 Sales and Marketing
(11,250
) (14,579) (18,582) (23,356) (27,630) (31,705)
7 Administrative
(13,500
) (13,254) (15,485) (16,769) (17,959) (20,608)
8 EBITDA 16,250 20,238 21,816 24,373 28,393 32,094
9 Depreciation (5,500) (5,450) (5,405) (6,865) (7,678) (7,710)
10 EBIT 10,750 14,788 16,411 17,508 20,715 24,383
11 Interest Expense
(net) (75) (6,800) (6,800) (6,800) (7,820) (8,160)
12 Pretax Income 10,675 7,988 9,611 10,708 12,895 16,223
13 Income Tax (3,736) (2,796) (3,364) (3,748) (4,513) (5,678)
14 Net Income 6,939 5,193 6,247 6,960 8,382 10,545
Pro Forma Balance Sheet for Ideko, 2010-2015
Year 2010 2011 2012 2013 2014 2015
Balance Sheet ($ 000)
Assets
1 Cash and Cash Equivalents 6,164 7,262 8,485 9,845 11,355 13,030
2 Accounts Receivable 18,493 14,525 16,970 19,689 22,709 26,059
3 Inventories 6,165 6,501 7,613 8,854 10,240 11,784
4 Total Current Assets 30,822 28,288 33,067 38,388 44,304 50,872
5 Property, Plant, and
Equipment 49,500 49,050 48,645 61,781 69,102 69,392
6 Goodwill 72,332 72,332 72,332 72,332 72,332 72,332
7 Total Assets
152,65
4 149,670 154,044 172,501 185,738 192,597
Liabilities
8 Accounts Payable 4,654 5,532 6,648 7,879 9,110 10,448
9 Debt
100,00
0 100,000 100,000 115,000 120,000 120,000
10 Total Liabilities
104,65
4 105,532 106,648 122,879 129,110 130,448
Stockholders' Equity
11 Starting Stockholders'
Equity 48,000 44,138 47,396 49,621 56,628
12 Net Income 5,193 6,247 6,960 8,382 10,545
13 Dividends (2,000) (9,055) (2,989) (4,735) (1,375) (5,024)
14 Capital Contributions 50,000 --- --- --- --- ---
15 Stockholders' Equity 48,000 44,138 47,396 49,621 56,628 62,149
16 Total Liabilities and
Equity
152,65
4 149,670 154,044 172,501 185,738 192,597
33
22) Assuming that Ideko has an EBITDA multiple of 8.5, then the continuation enterprise
value of Ideko in 2015 is closest to ________.
A) $152.812 million
B) $272.799 million
C) $301.173 million
D) $181.072 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
23) Assuming that Ideko has an EBITDA multiple of 9.4, then the continuation enterprise
value of Ideko in 2015 is closest to ________.
A) $181.279 million
B) $152.799 million
C) $272.187 million
D) $301.684 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
24) Assuming that Ideko has an EBITDA multiple of 8.5, then the continuation EV/Sales
ratio of Ideko in 2015 is closest to ________.
A) 1.7
B) 1.9
C) 1.6
D) 1.8
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
34
25) Assuming that Ideko has an EBITDA multiple of 9.4, then the continuation EV/Sales
ratio of Ideko in 2015 is closest to ________.
A) 1.9
B) 1.7
C) 1.6
D) 1.8
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
26) Assuming that Ideko has an EBITDA multiple of 8.5, then the continuation unlevered
price-earnings ratio of Ideko in 2015 is closest to ________.
A) 25.9
B) 16.4
C) 14.5
D) 19.0
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
35
27) Assuming that Ideko has an EBITDA multiple of 9.4, then the continuation unlevered
price-earnings ratio of Ideko in 2015 is closest to ________.
A) 17.2
B) 16.4
C) 14.5
D) 28.6
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
28) Assuming that Ideko has an EBITDA multiple of 8.5, then the continuation levered
price-earnings ratio of Ideko in 2015 is closest to ________.
A) 19.0
B) 17.2
C) 16.4
D) 14.5
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
36
29) Assuming that Ideko has an EBITDA multiple of 9.4, then the continuation levered
price-earnings ratio of Ideko in 2015 is closest to ________.
A) 17.2
B) 14.5
C) 19.0
D) 16.4
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
30) Is total net working capital or incremental net working capital more relevant for
calculation of free cash low?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
31) Why is EBITDA multiple used for valuation rather than sales or earnings?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
32) How do we know if expansion is a good idea for the irm?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
37
