Question

Consider the following abbreviated financial statements for Pinghua:

PINGHUA 2014 and 2015 Partial Balance Sheets
Assets								Liabilities and Owners’ Equity
		2014			2015					2014			2015
Current assets	$	1,850		$	2,100			Current liabilities	$	740		$	860
Net fixed assets		7,850			9,120			Long-term debt		4,000			4,300
								Equity		4,960			6,060

PINGHUA 2015 Income Statement Info
Sales	$	11,300
Costs		5,500
Depreciation		1,000
Interest paid		200

The tax rate is 35%. Long term debt trades at 112% of par. The firm has 500 shares outstanding. Free Cash Flow to the Firm and the Free Cash Flow to Equity are both expected to grow at 2% forever. The weighted average cost of capital is 16%. The cost of equity is 24%.

Question 9

What is the Net Income for 2015? $______

Hint: Construct the Income Stmt using the partial info. You are almost there, you just have to compute the taxable income and subtract the income tax.

What is the Free Cash Flow to the Firm for 2015? $______

Hint: FCFF = ? = EBIT-Tax+D-chgNWC-Capex where Capex=chgNFA+D

What is the Value of the Firm (Assets)? $______

Hint: FCFF / (WACC -g)

What is the stock price per share using the discounted FCFF valuation? $______

Hint: Take the previous answer, subtract the market value of Debt, that will produce the value of the Equity. Then divide by the number of shares.

What is the Free Cash Flow to Equity for 2015? $______

Hint: The easiest way is FCFE = FCFF - interest + chgDebt or follow the original FCFE equation.

What is the stock price per share using the discounted FCFE valuation? $______

Hint: FCFE / (RE - g) gives you the value of Equity, then divide by the number of shares.

Answer 1

	Q.9.
	PINGHUA
	2015 Income Statement	Amt $
	Salces	$          11,300
	Costs	$            5,500
	Dereciation	$            1,000
	EBIT	$            4,800
	Interest paid	$                200
	EBT	$            4,600
	Tax @35%	$            1,610
	Net Income	$            2,990
ans a.	So Net Income for 2015=$2,990

	FCFF Calculation
	Balance sheet partial data	2014	2015
1	Current Asset	$            1,850	$            2,100
2	Less Current Liabilities	$                740	$               860
	Working Capital =1-2=	$            1,110	$            1,240
	Increase in Working Capital		$               130
3	Net Fixed Asset	$            7,850	$            9,120
4	Increase in NFA	$            1,270
5	Add Depreciation	1,000
	Additional Capital Spending =4+5=	$            2,270

	FCFF =EBIT-Tax +Depreciation-Capital expenditure-Change in NWC
	so FCFF=4800-1610+1000-2270-130 =	$       1,790.00
Ans b.	So Free Cash flow to Firm=$1,790

	The perpetual growth rate is g=2%
	WACC=16%
Ans c.	So Value of Firm FCFF/(WACC-g)=1790/(16%-2%)=	$    12,785.71

	Book value of debt in 2015 =4300
	Market value of debt @112% of par in 2015=	$            4,816
	Now value of firm=$12785.71
	Value of Equity =Value of firm-Market Value of debt=	$       7,969.71
	No of shares outstanding =	500

Ans d.	Value per share =7969.71/500=	$            15.94
	Balance sheet partial data	2014	2015
	Long term debt	$            4,000	$            4,300
	Additional debt raised		$               300

	FCFE calculation
	FCFE=FCFF-Interest +change in Debt
	FCFE=1790-200+300=1890
Ans e	So Free cash flow to Equity =$1,890
	Cost of equity =k=24%
	The perpetual growth rate is g=2%
	Value of Equity =FCFE/(k-g)=1890/(24%-2%)=	$       8,590.91
	No of shares outstanding =	500
Ans f	Stock price/share=8590.91/500=	$            17.18