Question

1. Spirialtex Inc., announced aggressive growth plans over the next three years. Below are the expected investments in fixed and working capital and corresponding pro forma income statements for each of the next 3 years.

Year	1	2	3
Tax Rate	40%	40%	40%
Capital Expenditures	20	30	40
Change in NWC	5	6	7
Shares Outstanding	6	6	6
Sales (000,000)	150	200	250
COGS	75	100	125
Sales & Administrative Expense	15	20	25
Depreciation & Amortization	50	51	52
Total Operating Costs	140	171	202
Operating Income (EBIT)	10	29	48
Earnings Before Taxes	6	24	42
Taxes	2.4	9.6	16.8
Net Income	3.6	14.4	25.2
EPS	0.6	2.4	4.2

What is the free cash flow to the firm in Year 1?

$100.21

$31.00

$21.00

$18.00

$10.00

2.

Spirialtex Inc., announced aggressive growth plans over the next three years. Below are the expected investments in fixed and working capital and corresponding pro forma income statements for each of the next 3 years.

Year	1	2	3
Tax Rate	40%	40%	40%
Capital Expenditures	20	30	40
Change in NWC	5	6	7
Shares Outstanding	6	6	6
Sales (000,000)	150	200	250
COGS	75	100	125
Sales & Administrative Expense	15	20	25
Depreciation & Amortization	50	51	52
Total Operating Costs	140	171	202
Operating Income (EBIT)	10	29	48
Earnings Before Taxes	6	24	42
Taxes	2.4	9.6	16.8
Net Income	3.6	14.4	25.2
EPS	0.6	2.4	4.2

2. Spirialtex has a corporate cost of capital of 12% and is expected to have a long run growth rate of 4%. What is the horizon value of the firm?

Group of answer choices

$439.40

$309.40

$211.50

$177.11

$125.00

3.

Assuming the firm has no short-term investments, what is the total value of the firm?

Group of answer choices

$350.00

$390.32

$273.77

$418.00

$210.50

4.

Spirialtex has 6 million common shares outstanding and $100 million in debt. What is the current equity value of the firm’s stock price?

Group of answer choices

$77.21

$85.50

$48.39

$28.96

$90.25

Answer 1

Solution:

Solving question first as HOMEWORKLIB's guidelines:

1.Calculation of Free cash flow for year 1

Free cash flow=[Operating Income(1-tax rate)+Depreciation]-Capital Investment-Increase in working capital

=[$10(1-0.40)+$50]-$20-$5

=$31

Thus correct answer is $31