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Valuation
Measuring and Managing the Value of Companies
5th Edition
Chapter 6 Solutions
Frameworks for Valuation
Version 1.0
April 1, 2010
Chapter 6
Question 1
Income Statement Reorganized balance sheet
Today Year 1 Today Year 1
Revenues 800.0 840.0 Operating working capital 70.1 73.6
Operating costs (640.0) (672.0) Property and equipment 438.4 460.3
Key Data:
Operating tax rate 25% 25%
Free cash #ow
Year 1
Operating profit 126.0
Chapter 6
Question 2
Equity value
Weighted average cost of capital
Proportion A,er-tax Contribution
Market of total Cost of Marginal cost of to weighted
Source of capital value capital capital tax rate capital average
Commentary
The market value of debt will not equal book value if the company is distressed (i.e. the probability of default is meaningful) or
if interest rates have changed meaningfully since the debt was issued.
Chapter 6
Questions 3 & 4
Enterprise Valuation
Equity Valuation
Chapter 6
Questions 5 & 6
Economic pro1t Economic pro1t valuation
Year 1 PV (economic pro1t) Year 1
Commentary
As can be seen by comparing enterprise value in Question 6 with that of Question 4, the two values are identical (as expected).
More commentary on Question 6
Continuing Value(t) = NOPLAT(t+1)*[1-g/RONIC]/[WACC-g]
where RONIC is the return on on new capital.
Unless the firm has some sustainable competitive advantage, ROIC=WACC.
Continuing Value(0) = NOPLAT(1)*[1-g/RONIC]/[WACC-g]
This is an estimate of enterprise value.
If done correctly, the estimate using this method should equal that using the DCF method.
Chapter 6
Question 7
Cash #ow to equity Direct equity valuation
$ million
Income Statement Today Year 1 Reorganized balance sheet Today Year 1
Exhibit Data:
Income Statement Today Year 1 Balance sheet Today Year 1
EXHIBIT 6.18 BrandCo: Income Statement and Reorganized Balance Sheet
1 Accounts payable has been neLed against inventory to determine operating working capital
