Question

26) CathFoods will release C-4 a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost $5 million, which will be depreciated by straight- line depreciation over four years. In addition, there will be $5 million spent on promoting the new expected that the range of candies will bring in revenues of S7 million per year for four years w production and support costs the incremental free cash flows in the second year of this project? A) S1.488 million candy line. It is of S1.5 million p er year. If Cat Foods' marginal tax rate is 35%, what are B) $4.013 million C) $2.450 million D) $4.250 million 27) Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $7,000,000 to buy the machine and S15,000 to have it delivered and installed. Building a clean room in the plant for the machine will cost an additional $3 million. The machine is expected to raise gross profits by $4,000,000 per year, starting at the end of the first year, with associated costs of $1 million for each of those years. The machine is expected to have a working life of six years and will be depreciated over those six years. The marginal tax rate is 40%. What are the incremental free cash flows associated with the new machine in year 2? A) $1,164,167 27) D) $1,169,167 B) $1,830,833 C) 32,267,667 28) Epiphany Industries is considering a new capital budgeting project that will last for three years 28 Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects Year $125.000 S125,000 $125. 62.500 Sales (Revenues) 62,500 62,500 Cost of Goods Sold (50% of Sales) Depreciation 20,000 20,000 42,500 42,500 42.500 EBIT 14,875 14,875 4,875 Taxes (35%) 27,625 27,625 27,625 unlevered net income 20,000 20,000 +Depreciation increase decrease) in working 5,000 10,000 5,000 capital expenditures The free cash flow for the last year of Epiphany's project is closest to B) S51,863 D)$43,219 C) $46,100 A) $57,625 29 Gonzales Corporation generated free cash flow of $88 million this year. For the next two years, the 29) company's free cash flow is expected to grow at a rate of 7%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is l 1% and Gonzales Corporation has cash of $100 million, debt of $300 million. and 100 million shares outstanding, what is Gonzales Corporation's expected terminal enterprise value in year 2? A) S1047.81 D) $1496.87 C) S1347.19 B) S1197.50 30 Year Free Cash Flow $26 million $12 million $22 million S18 million Conundrum Mining is expected to generate the above free cash flows over the next four years, after which they are expected to grow at a rate of 4% per year. If the weighted average cost of capital is 12% and Conundrum has cash of $80 million, debt of S60 million, and 30 million shares outstanding, what is Conundrum's expected current share price? D) $12.66 C) S 16.06 B) $9.74 A) $15.58

Answer 1

26-	revenue		7
	production and support cost		1.5
	depreciation		1.25
	EBIT		4.25
	tax -35%		1.4875
	after tax profit		2.7625
	add depreciation		1.25
	free cash flow In year 2		4.013
27-	revenue		4000000
	production and support cost		1000000
	depreciation		1169166.667
	EBIT		1830833.333
	tax -40%		732333.3333
	after tax profit		1098500
	add depreciation		1169166.667
	free cash flow In year 2		2267667
28-	Unlevered net income		27625
	add depreciation		20000
	add decrease in working capital		10000
	free cash flow in last year		57625
29-	Year	free cash flow = current free cash flow*(1+growth rate)	free cash flow = current free cash flow*(1+growth rate)
	0	88
	1	88*1.07	94.16
	2	88*1.07^2	100.7512
	3	100.7512*1.04	104.781248
	Terminal value in year 2 = free cash flow in year 3/(WACC-growth rate)	104.7812/(11%-4%)	1496.87
30-	expected cash flow in year 5	26*1.04	27.04
	terminal value in year 4	free cash flow in year 5/(WACC-growth rate)	27.04/(12%-4%)	338
	Year	cash flow	present value of cash flow = cash flow/(1+r)^n r = 12%
	1	12	10.71428571
	2	18	14.3494898
	3	22	15.65916545
	4	26	16.52347004
	4	338	214.8051105
	present value of free cash flow		272.0515215
	add available cash		80
	less debt		60
	total value of equity		292.0515215
	value per share	292.0515/30	9.74