61) A firm has $80 million in equity and $40 million of debt, it pays dividends of 20% of net income, and has a
net income of $10 million. What is the firm’s sustainable growth rate?
A) 10%
B) 7%
C) 9%
D) 8%
62) A firm expects growth next year to be 12%. Its sustainable growth rate is 10%. Which of the following is
true?
A) The firm may be able to keep its debt to equity ratio the same by reducing dividends (assuming they
are projected to be high enough).
B) The firm will have excess cash to increase dividends, pay back debt, or repurchase equity.
C) The firm will need to raise additional capital through a stock issue.
D) The firm will need to raise additional debt such that its debt to equity ratio will increase.
63) A firm expects growth next year to be 10%. Its sustainable growth rate is 12%. Which of the following is
true?
A) The firm may be able to keep its debt to equity ratio the same by reducing dividends (assuming they
are projected to be high enough).
B) The firm will need to raise additional capital through a stock issue.
C) The firm will need to raise additional debt such that its debt to equity ratio will increase.
D) The firm will have excess cash to increase dividends, pay back debt, or repurchase equity.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
65) For valuing a planned expansion, in addition to forecasting cash flows we need to estimate the firm’s
continuation value.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
66) Compute the after–tax interest expense for a firm with Interest on Excess Cash = $1000, Interest on Debt =
$5000, and a tax rate of 30%.
A) $3300
B) $2800
C) $3100
D) $2500
67) Compute the after–tax interest expense for a firm with Interest on Excess Cash = $2000, Interest on Debt =
$7000, and a tax rate of 30%.
A) $2500
B) $3100
C) $3500
D) $2800
68) Compute the after–tax interest expense for a firm with Interest on Excess Cash = $5000, Interest on Debt =
$8000, and a tax rate of 30%.
A) $2700
B) $2100
C) $2500
D) $2200
69) Given the following data for a given period, compute the free cash flow to the firm:
Net Income = $10,000
After–tax Interest Expense = $1000
Depreciation = $1000
Increase in NWC = $1000
Capital Expenditures = $2000
A) $9000
B) $9900
C) $9500
D) $9700
70) Given the following data for a given period, compute the free cash flow to the firm:
Net Income = $12,000
After–tax Interest Expense = $2000
Depreciation = $1000
Increase in NWC = $2000
Capital Expenditures = $1000
A) $12,000
B) $11,000
C) $13,000
D) $10,000
71) Given the following data for a given period, compute the free cash flow to the firm:
Net Income = $5000
After–tax Interest Expense = $500
Depreciation = $500
Increase in NWC = $1000
Capital Expenditures = $2000
A) $3700
B) $3500
C) $3000
D) $3900
72) What is the free cash flow to equity holders for a firm with free cash flow of $7000, after–tax interest expense
of $1000, and an increase in debt of $3000?
A) $7000
B) $6000
C) $8000
D) $9000
73) What is the free cash flow to equity holders for a firm with free cash flow of $11000, after–tax interest expense
of $2000, and an increase in debt of $2000?
A) $9000
B) $7000
C) $11,000
D) $8000
74) What is the free cash flow to equity holders for a firm with free cash flow of $9000, after–tax interest expense
of $3000, and an increase in debt of $1000?
A) $7000
B) $8000
C) $9000
D) $6000
75) The estimate of a firm’s value at the end of the forecast horizon using a valuation multiple is also called its
A) fixed value.
B) terminal value.
C) payback value.
D) none of the above
76) Pledrea Inc. has EBITDA at the forecast horizon of $10,000. Its EBITDA multiple is 11. What is the
terminal value of the firm at the forecast horizon?
A) $120,000
B) $130,000
C) $110,000
D) $100,000
77) Pledrea Inc. has EBITDA at the forecast horizon of $13,000. Its EBITDA multiple is 10. What is the
terminal value of the firm at the forecast horizon?
A) $130,000
B) $110,000
C) $120,000
D) $100,000
78) Pledrea Inc. has EBITDA at the forecast horizon of $10,000. Its EBITDA multiple is 12. What is the
terminal value of the firm at the forecast horizon?
A) $120,000
B) $130,000
C) $100,000
D) $110,000
79) Compute the value of a firm with free cash flows of $4000, $4500, and $5000 over the next three years, a
terminal firm 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) $59,123
B) $57,234
C) $58,098
D) $56,191
80) Compute the value of a firm with free cash flows of $1000, $2500, and $3000 over the next three years, a
terminal firm 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) $31,033
B) $27,234
C) $39,343
D) $26,191
81) Compute the value of a firm with free cash flows of $9000, $7000, and $5000 over the next three years, a
terminal firm 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) $38,745
B) $36,109
C) $37,098
D) $40,263
82) A firm has interest expense of $6500 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) $16,578
C) $16,424
D) $16,987
83) A firm has interest expense of $2500 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) $5918
B) $6987
C) $5268
D) $5,744
84) A firm has interest expense of $3500 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) $7091
B) $7514
C) $8716
Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2010–2015
Year
2010
2011
2012
2013
2014
2015
Income Statement ($ 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 Profit
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
152,654
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
100,000
100,000
100,000
115,000
120,000
120,000
10 Total Liabilities
104,654
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
152,654
149,670
154,044
172,501
185,738
192,597
85) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation enterprise value of Ideko in 2015 is
closest to:
A) $181.7 million
B) $272.8 million
C) $301.7 million
D) $152.8 million
86) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation equity value of Ideko in 2015 is
closest to:
A) $181.7 million
B) $152.8 million
C) $272.8 million
D) $301.7 million
87) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation enterprise value of Ideko in 2015 is
closest to:
A) $272.8 million
B) $181.7 million
C) $301.7 million
D) $152.8 million
88) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation equity value of Ideko in 2015 is
closest to:
A) $272.8 million
B) $301.7 million
C) $181.7 million
D) $152.8 million
89) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation EV/Sales ratio of Ideko in 2015 is
closest to:
A) 1.7
B) 1.6
C) 1.9
D) 1.8
90) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation EV/Sales ratio of Ideko in 2015 is
closest to:
A) 1.6
B) 1.9
C) 1.7
D) 1.8
91) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation unlevered price–earnings ratio of
Ideko in 2015 is closest to:
A) 14.5
B) 16.4
C) 25.9
D) 19.0
92) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation unlevered price–earnings ratio of
Ideko in 2015 is closest to:
A) 28.6
B) 16.4
C) 17.2
D) 14.5
93) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation levered price–earnings ratio of
Ideko in 2015 is closest to:
A) 16.4
B) 14.5
C) 17.2
D) 19.0
94) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation levered price–earnings ratio of
Ideko in 2015 is closest to:
A) 17.2
B) 16.4
C) 19.0
D) 14.5
Use the tables for the question(s) below.
Estimated 2011 Income Statement and Balance Sheet Data for Ideko Corporation
Year
2011
Year
2011
Income Statement ($ 000)
Balance Sheet ($ 000)
1 Sales
75,000
Assets
2 Cost of Goods Sold
1 Cash and Equivalents
12,664
3 Raw Materials
(16,000)
2 Accounts Receivable
18,493
4 Direct Labor Costs
(18,000)
3 Inventories
6,165
5 Gross Profit
1,000
4 Total Current Assets
37,322
6 Sales and Marketing
(11,250)
5 Property, Plant, and Equipment
49,500
7 Administrative
(13,500)
6 Goodwill
—
8 EBITDA
16,250
7 Total Assets
86,822
9 Depreciation
(5,500)
Liabilities and Stockholders’ Equity
10 EBIT
10,750
8 Accounts Payable
4,654
11 Interest Expense (net)
(75)
9 Debt
4,500
12 Pretax Income
10,675
10 Total Liabilities
9,154
13 Income Tax
(3,736)
11 Stockholders’ Equity
77,668
14 Net Income
6,939
12 Total Liabilities and Equity
86,822
The following are financial ratios for three comparable companies:
Ratio
Oakley, Inc.
Luxottica Group
Nike, Inc.
P/E
24.8x
28x
18.2x
EV/Sales
2x
2.7x
1.5x
EV/EBITDA
11.6x
14.4x
9.3x
EBITDA/Sales
17.0%
18.5%
15.9
95) Based upon the average price–earnings ratio of the comparable firms, Ideko’s target market value of equity is
closest to:
A) $155 million
B) $191 million
C) $165 million
D) $157 million
E) $193 million
96) Based upon the average EV/Sales ratio of the comparable firms, Ideko’s target economic value is closest to:
A) $157 million
B) $155 million
C) $165 million
D) $191 million
E) $193 million
97) Based upon the average EV/Sales ratio of the comparable firms, if Ideko holds $6.5 million of cash in excess
of its working capital needs, then Ideko’s target market value of equity is closest to:
A) $157 million
B) $165 million
C) $155 million
D) $193 million
E) $191 million
98) Based upon the average EV/EBITDA ratio of the comparable firms, Ideko’s target economic value is closest
to:
A) $193 million
B) $155 million
C) $157 million
D) $191 million
E) $165 million
99) Based upon the average EV/EBITDA ratio of the comparable firms, if Ideko holds $6.5 million of cash in
excess of its working capital needs, then Ideko’s target market value of equity is closest to:
A) $193 million
B) $191 million
C) $165 million
D) $155 million
E) $157 million
100) Is total net working capital or incremental net working capital more relevant for calculation of free cash
flow?
101) Why is EBITDA multiple used for valuation rather than sales or earnings?
102) How do we know if expansion is a good idea for the firm?
