EBK FINANCIAL MANAGEMENT: THEORY & PRAC
15th Edition
ISBN: 9781305886902
Author: EHRHARDT
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 11, Problem 4MC
Summary Introduction
Case summary:
Company S desires to add a new line to its product mix. For this purpose the analysis of capital budgeting was conducted by person S an MBA graduate. The invoice price of the machinery is $200,000 approximately and $10,000 shipping charges are required. Installation charges are $30,000. The machinery has a 4 years’ life with a salvage value of $25000.
The new line leads to increase the sales of 1,250 units each year of 4 years and cost of $100 per unit in first year. The units are sold for $200 in the 1st year.
It results to an increase in company’s net working capital by 12% value of sales. Company’s tax rate is 40% and risk adjusted cost of capital or weighted average cost of capital for an average project is 10%.
Characters in the case:
- Company S
- Person S
To compute: The annual incremental operating cash flow statements.
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(d) Estimate the value of a share of Cisco common stock using the discounted cash flow (DCF) model as of July 27, 2019 using the following assumptions
Assumptions
Discount rate (WACC)
Common shares outstanding
7.60%
5,029.00 million
Net nonoperating obligations (NNO) $(8,747) million
NNO is negative, which means that Cisco has net nonoperating investments
CSCO
($ millions)
DCF Model
Reported
2019
Forecast Horizon
2020 Est.
2021 Est.
2022 Est.
2023 Est.
Terminal
Period
Increase in NOA
FCFF (NOPAT - Increase in NOA)
$
1241
1303
1368
10673
11207
11767
1437 $
12354
302 ✓
Present value of horizon FCFF
9918
9679
9445 ✔
0 ×
Cum. present value of horizon FCFF $
0 ×
Present value of terminal FCFF
0 ☑
Total firm value
0 ☑
NNO
-8747 ✓
Firm equity value
$
0 ☑
Shares outstanding (millions)
5029
Stock price per share
$
40.05
Chapter 11 Solutions
EBK FINANCIAL MANAGEMENT: THEORY & PRAC
Ch. 11 - Why is it true, in general, that a failure to...Ch. 11 - Prob. 4QCh. 11 - Explain how net operating working capital is...Ch. 11 - How do simulation analysis and scenario analysis...Ch. 11 - Why are interest charges not deducted when a...Ch. 11 - Most firms generate cash inflows every day, not...Ch. 11 - What are some differences in the analysis for a...Ch. 11 - Distinguish among beta (or market) risk,...Ch. 11 - Prob. 11QCh. 11 - Prob. 1P
Ch. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 10PCh. 11 - Shao Industries is considering a proposed project...Ch. 11 - The Everly Equipment Company’s flange-lipping...Ch. 11 - The Bartram-Pulley Company (BPC) must decide...Ch. 11 - The Yoran Yacht Company (YYC), a prominent...Ch. 11 - Prob. 1MCCh. 11 - Prob. 2MCCh. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 14MC
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