Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Chapter 8, Problem 9P
a.
Summary Introduction
To determine: The incremental earnings for year 1 and year 2.
b.
Summary Introduction
To determine: The free cash flows for this project for the first two years.
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Etobicoke Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars):
Year 2
Revenues
Operating Expenses (other than depreciation)
CCA
Increase in Net Working Capital
Capital Expenditures
Marginal Corporate Tax Rate
Sales
Operating Expenses
CCA
EBIT
Income tax at 35%
Unlevered Net Income
$
a. What are the incremental earnings for this project for years 1 and 2? (Note: Assume any incremental cost of goods sold is included as part of operating expenses.)
b. What are the free cash flows for this project for the first two years?
$
Year 1
a. Calculate the incremental earnings for Year 1 of this project below: (Round to one decimal place.)
Incremental Earnings Forecast (millions)
$
122.7
33.4
22.7
3.6
30.3
35%
Year 1
166.6
52.1
43.2
8.5
41.7
35%
O
C
Etobicoke Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in milions
of dollars)
Revenues
Operating Expenses (other than depreciation)
CCA
Increase in Net Working Capital
Capital Expenditures
Marginal Corporate Tax Rate
S
Year 1
S
121.2
47.6
21.2
S
3.3
30.3
35%
Year 2
a What are the incremental earnings for this project for years 1 and 27 (Note: Assume any incremental cost of goods sold is included as part of operating expenses.)
b. What are the tree cash flows for this project for the first two years?
O
a Calculate the incremental earings for Year 1 of this project below. (Round to one decimal place.)
Incremental Earnings Forecast (millions)
Year 1
Sales
Operating Expenses
CCA
EBIT
Income tax at 35%
Unlevered Net Income
152.7
56.2
42.9
8.1
36.6
La Falaise Rouge Enterprises is deciding whether to expand its production
facilities. Although long-term cash flows are difficult to estimate,
management has projected the following cash flows for the first two years
(in millions of dollars). Calculate the unlevered net income for Year 2.
Revenues
Costs of goods sold and operating expenses other than depreciation
Depreciation
Increase in networking capital
Capital expenditures
Marginal corporate tax rate
Year 1
108
-36.6
-24.2
5.1
32.1
43%
Year 2
156
-36.6
-38.6
8.9
42.5
43%
Chapter 8 Solutions
Corporate Finance
Ch. 8.1 - How do we forecast unlevered net income?Ch. 8.1 - Prob. 2CCCh. 8.1 - Prob. 3CCCh. 8.2 - Prob. 1CCCh. 8.2 - What is the depreciation tax shield?Ch. 8.3 - Prob. 1CCCh. 8.3 - Prob. 2CCCh. 8.4 - Prob. 1CCCh. 8.4 - What is the continuation or terminal value of a...Ch. 8.5 - Prob. 1CC
Ch. 8.5 - How does scenario analysis differ from sensitivity...Ch. 8 - Pisa Pizza, a seller of frozen pizza is...Ch. 8 - Kokomochi is considering the launch of an...Ch. 8 - Home Builder Supply, a retailer in the home...Ch. 8 - Hyperion, Inc. currently sells its latest...Ch. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Castle View Games would like to invest in a...Ch. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - Prob. 11PCh. 8 - A bicycle manufacturer currently produces 300,000...Ch. 8 - Prob. 13PCh. 8 - Prob. 14PCh. 8 - Prob. 15PCh. 8 - Prob. 16PCh. 8 - Prob. 17PCh. 8 - Prob. 18PCh. 8 - Prob. 20PCh. 8 - Prob. 21P
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