11) The amount of net working capital for Ideko in 2007 is closest to:
A) $30,510
B) $26,420
C) $22,170
D) $35,195
12) The amount of net working capital for Ideko in 2008 is closest to:
A) $35,195
B) $26,420
C) $22,170
D) $30,510
13) The amount of the increase in net working capital for Ideko in 2007 is closest to:
A) $4090
B) $4685
C) $3665
D) $5230
14) The amount of the increase in net working capital for Ideko in 2008 is closest to:
A) $4685
B) $3665
C) $4090
D) $5230
15) Using the income statement above and the following information:
Year
2006
2007
2008
2009
2010
Increases in NWC
2250
3000
3250
3600
4000
Capital Expenditures
5000
5000
20,000
15,000
8000
Net Borrowing
0
0
15,000
5000
0
Calculate Ideko’s Free Cash Flow to the Firm and Free Cash Flow to Equity in 2007.
Year
Net Income
Expense
Unlevered Net Income
Plus: Depreciation
Less: Increases in NWC
(3250)
(3600)
Less: Capital Expenditures
Free Cash Flow of Firm
(5005)
Plus: Net Borrowing
Expense
(4420)
(5083)
Free Cash Flow to Equity
16) Using the income statement above and the following information:
Year
2006
2007
2008
2009
2010
Increases in NWC
2250
3000
3250
3600
4000
Capital Expenditures
5000
5000
20,000
15,000
8000
Net Borrowing
0
0
15,000
5000
0
Calculate Ideko’s Free Cash Flow to the Firm and Free Cash Flow to Equity in 2009.
Year
Net Income
Expense
Unlevered Net Income
Plus: Depreciation
Less: Increases in NWC
(3600)
Less: Capital Expenditures
Free Cash Flow of Firm
(5005)
Plus: Net Borrowing
Expense
(4420)
(5083)
Free Cash Flow to Equity
19.4 Estimating the Cost of Capital
Use the table for the question(s) below.
Capital Structure and Unlevered Beta Estimates for Comparable Firms
Firm
βE
βD
βU
Oakley
1.00
0.00
1.50
—
1.50
Luxottica
0.83
0.17
0.75
0
0.62
Nike
1.05
-0.05
0.60
0
0.63
1) The unlevered beta for Oakley is closest to:
A) 0.70
B) 1.50
C) 1.00
D) 0.60
2) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%, then
the cost of capital for Oakley is closest to:
A) 13.5%
B) 10.2%
C) 9.1%
D) 14.7%
3) The unlevered beta for Luxottica is closest to:
A) 1.00
B) 0.60
C) 0.70
D) 1.50
4) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%, then
the cost of capital for Luxottica is closest to:
A) 10.2%
B) 13.5%
C) 9.1%
D) 14.7%
5) The unlevered beta for Nike is closest to:
A) 0.70
B) 1.00
C) 1.50
D) 0.60
6) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%, then
the cost of capital for Nike is closest to:
A) 14.7%
B) 10.2%
C) 9.1%
D) 13.5%
26
19.5 Valuing the Investment
Use the following information to answer the question(s) below:
1) If Ideko’s future expected growth rate is 5%, then the estimated free cash flow for 2011 is closest to:
A) 6568
B) 11,151
C) 11,218
D) 12,137
2) If Ideko’s future expected growth rate is 5% and its WACC is 9%, then the continuation value in 2010
is closest to:
A) 164,200
B) 278,775
C) 280,450
D) 303,425
28
Use the tables for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
Year
2005
2006
2007
2008
2009
2010
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
(5500)
(5450)
(5405)
(6865)
(7678)
(7710)
10 EBIT
10,750
14,788
16,411
17,508
20,715
24,383
11 Interest Expense (net)
(75)
(6800)
(6800)
(6800)
(7820)
(8160)
12 Pre-tax Income
10,675
7988
9611
10,708
12,895
16,223
13 Income Tax
(3736)
(2796)
(3364)
(3748)
(4513)
(5678)
14 Net Income
6939
5193
6247
6960
8382
10,545
Pro Forma Balance Sheet for Ideko, 2005-2010
Year
2005
2006
2007
2008
2009
2010
Balance Sheet ($ 000)
Assets
1 Cash and Cash Equivalents
6164
7262
8485
9845
11,355
13,030
2 Accounts Receivable
18,493
14,525
16,970
19,689
22,709
26,059
3 Inventories
6165
6501
7613
8854
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
4654
5532
6648
7879
9110
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
Stockholder’s Equity
11 Starting Stockholder’s Equity
48,000
44,138
47,396
49,621
56,628
12 Net Income
5193
6247
6960
8382
10,545
13 Dividends
(2000)
(9055)
(2989)
(4735)
(1375)
(5024)
14 Capital Contributions
50,000
—
—
—
—
—
15 Stockholder’s 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
3) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation enterprise value of Ideko in
2010 is closest to:
A) $152.8 million
B) $272.8 million
C) $301.7 million
D) $181.7 million
4) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation equity value of Ideko in
2010 is closest to:
A) $181.7 million
B) $272.8 million
C) $152.8 million
D) $301.7 million
5) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation enterprise value of Ideko in
2010 is closest to:
A) $181.7 million
B) $152.8 million
C) $272.8 million
D) $301.7 million
6) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation equity value of Ideko in
2010 is closest to:
A) $152.8 million
B) $181.7 million
C) $301.7 million
D) $272.8 million
7) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation EV/Sales ratio of Ideko in
2010 is closest to:
A) 1.7
B) 1.9
C) 1.6
D) 1.8
8) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation EV/Sales ratio of Ideko in
2010 is closest to:
A) 1.9
B) 1.7
C) 1.6
D) 1.8
9) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation unlevered P/E ratio of
Ideko in 2010 is closest to:
A) 17.6
B) 16.4
C) 14.5
D) 19.0
10) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation unlevered P/E ratio of
Ideko in 2010 is closest to:
A) 17.2
B) 16.4
C) 14.5
D) 19.4
11) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation levered P/E ratio of Ideko
in 2010 is closest to:
A) 19.0
B) 17.2
C) 16.4
D) 14.5
12) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation levered P/E ratio of Ideko
in 2010 is closest to:
A) 17.2
B) 14.5
C) 19.0
D) 16.4
19.6 Sensitivity Analysis
1) What is the purpose of the sensitivity analysis?