Investments
11th Edition
ISBN: 9781259277177
Author: Zvi Bodie Professor, Alex Kane, Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Question
Chapter 18, Problem 19PS
Summary Introduction
To calculate: The value of a firm’s equity by using the
Introduction:
Free cash flow is a measurement and it shows the company’s efficiency in generating cash. After payment, sufficient cash is used for this. Growing cash flow indicates the increase of earning.
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The Netflix Corporation's cash flow from operations before interest and taxes was $5.25 milion in the year just ended, and it expects that this will grow by 6.5% per year for six years and 5.75% per year in perpetuity. To make this happen, the firm will have to invest an amount equal to 25% of pretax cash flow each year. The tax rate is 21%. Depreciation was $275,000 in the year just ended and is expected to grow at the same rate as the opening cash flow. The apropriate market capitalization rate for the unleveraged cash flow is 13.25% per year, and the firm currently has debt of $5.75 million outstanding and 4,250,000 shares outstanding. Use the free cash flow approach to calculate the price per share.
The MoMi Corporation's cash flow from operations before interest and taxes was $2 million
in the year just ended, and it expects that this will grow by 5% per year forever. To make this
happen, the firm will have to invest an amount equal to 20% of pretax cash flow each year.
The tax rate is 21%. Depreciation was $200,000 in the year just ended and is expected to grow
at the same rate as the operating cash flow. The appropriate market capitalization rate for
the unleveraged cash flow is 12% per year, and the firm currently has debt of $4 million
outstanding. Use the free cash flow approach to value the firm's equity.
The MoMi Corporation’s cash flow from operations before interest and taxes was $2.4 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 18% of pretax cash flow each year. The tax rate is 21%. Depreciation was $300,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 12% per year, and the firm currently has debt of $4 million outstanding. Use the free cash flow approach to calculate the value of the firm and the firm’s equity. (Enter your answer in dollars not in millions.)
Chapter 18 Solutions
Investments
Ch. 18 - Prob. 1PSCh. 18 - Prob. 2PSCh. 18 - Prob. 3PSCh. 18 - Prob. 4PSCh. 18 - Prob. 5PSCh. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Prob. 8PSCh. 18 - Prob. 9PSCh. 18 - Prob. 10PS
Ch. 18 - Prob. 11PSCh. 18 - Prob. 12PSCh. 18 - Prob. 13PSCh. 18 - Prob. 14PSCh. 18 - Prob. 15PSCh. 18 - Prob. 16PSCh. 18 - Prob. 17PSCh. 18 - Prob. 18PSCh. 18 - Prob. 19PSCh. 18 - Prob. 20PSCh. 18 - Prob. 1CPCh. 18 - Prob. 2CPCh. 18 - Prob. 3CPCh. 18 - Prob. 4CPCh. 18 - Prob. 5CPCh. 18 - Prob. 6CPCh. 18 - Prob. 7CPCh. 18 - Prob. 8CPCh. 18 - Prob. 9CPCh. 18 - Prob. 10CPCh. 18 - Prob. 11CP
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- The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?arrow_forwardThe MoMi Corporation’s cash flow from operations before interest and taxes was $2.2 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 19% of pretax cash flow each year. The tax rate is 21%. Depreciation was $210,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 10% per year, and the firm currently has debt of $4.1 million outstanding. Use the free cash flow approach to value the firm’s equity. (Round answer to nearest whole number. Enter your answer in dollars not in millions.)arrow_forwardThe MoMi Corporation's cash flow from operations before interest and taxes was $2.1 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 15% of pretax cash flow each year. The tax rate is 21%. Depreciation was $270,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 14% per year, and the firm currently has debt of $4 million outstanding. Use the free cash flow approach to calculate the value of the firm and the firm's equity. (Enter your answer in dollars not in millions.) Answer is complete but not entirely correct. Value of the firm Value of the firm's equity $ $ 16,203,833 X 12,203,833 xarrow_forward
- The MoMi Corporation's cash flow from operations before interest and taxes was $5.2 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 18% of pretax cash flow each year. The tax rate is 21%. Depreciation was $360,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 9% per year, and the firm currently has debt of $7.1 million outstanding. Use the free cash flow approach to value the firm's equity. (Round answer to nearest whole number. Enter your answer in dollars not in millions.) Value of the equityarrow_forwardThe MoMi Corporation's cash flow from operations before interest and taxes was $2.4 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 18% of pretax cash flow each year. The tax rate is 21%. Depreciation was $220,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 9% per year, and the firm currently has debt of $4.2 million outstanding. Use the free cash flow approach to value the firm's equity. Note: Round answer to nearest whole number. Enter your answer in dollars not in millions. Value of the equity $ 40,005,000arrow_forwardThe MoMi Corporation’s cash flow from operations before interest and taxes was $3.4 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 16% of pretax cash flow each year. The tax rate is 21%. Depreciation was $400,000 in the year just ended and is expected to grow at the same rate as the operating cash flow. The appropriate market capitalization rate for the unleveraged cash flow is 12% per year, and the firm currently has debt of $7 million outstanding. Use the free cash flow approach to calculate the value of the firm and the firm’s equityarrow_forward
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