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Post Task 3, Question 1

This document provides financial information for Brand Co, including income statements and balance sheets for years 1-6. It asks the reader to calculate NOPLAT and free cash flow for each year using the provided data and formulas from prior lessons. It then provides additional financial details and asks the reader to calculate the company's market capitalization based on share price and outstanding shares. Using the calculated market value of debt and equity, it asks the reader to determine the weights of debt and equity and compute the weighted average cost of capital (WACC) based on given costs of debt and equity.

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SHARMAINE CORPUZ MIRANDA
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195 views4 pages

Post Task 3, Question 1

This document provides financial information for Brand Co, including income statements and balance sheets for years 1-6. It asks the reader to calculate NOPLAT and free cash flow for each year using the provided data and formulas from prior lessons. It then provides additional financial details and asks the reader to calculate the company's market capitalization based on share price and outstanding shares. Using the calculated market value of debt and equity, it asks the reader to determine the weights of debt and equity and compute the weighted average cost of capital (WACC) based on given costs of debt and equity.

Uploaded by

SHARMAINE CORPUZ MIRANDA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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MIRANDA, SHARMAINE C.

BSA-3A

The table displays the income statement and reorganized balance sheet for Brand
Co, a consumer products company. Using the methodology discussed in Lesson
2, determine net operating profit less adjusted taxes (NOPLAT) for years 1 to 6.
Assume an operating tax rate of 30 percent. Using the methodology in Lesson 2
also to determine free cash flow for years 1 to 6. Do this using Microsoft Excel.
QUESTION #1
Calculation of NOPLAT:
Year 1 2 3 4 5 6
Revenues 4,841.50 4,304.20 4,538.90 4,859.00 5,126.20 5,382.50
Operating Cost -3,435.20 -3,658.50 3,896.30 -4,130.10 4,357.30 4,575.10

Depreciation -97 -103.3 110 116.6 123 129.2

Operating
509.3 542.4 532.6 612.3 645.9 678.2
EBITDA

Operating Cash
-152.8 -162.7 159.8 183.7 193.8 203.5
taxes (30%)

NOPLAT 356.5 379.7 372.8 428.6 452.1 472.7

Calculation of free
cash flow:

Year 1 2 3 4 5 6
NOPLAT 356.5 379.7 372.8 428.6 452.1 474.7
Depreciation 97 103.3 110 116.6 123 129.7
Gross cash flow 454.5 485 485.8 549.2 580.1 609.9
Decrease(increas
e) in operating 13.2 13.1 14 13.7 13.4 12.8
working capital
Capital
expenditure net of 105.8 105.1 111.9 110 106.9 102.5
disposals
FREE CASH
361.9 393 387.9 452.9 486.6 520.2
FLOW
MIRANDA, SHARMAINE C.
BSA-3A

Using the same information in Question 1, Brand Co currently has 65.6 million shares outstanding.
If Brand Co’s shares are trading at $57 per share, what is the company’s market capitalization (value
of equity)? Assuming the market value of debt equals today’s book value of debt, what percentage
of the company’s value is attributable to debt, and what percentage is attributable to equity? When
would the market value of debt not equal the book value? Using these weights, compute the
weighted average cost of capital. Assume the pretax cost of debt is 8 percent, the cost of equity is
12 percent, and the marginal tax rate is 30 percent. Do this using Microsoft Excel.

ANSWER:
Compute company's market capitalization as follows:
Company's market capitalization = Shares outstanding x Current price
= $65.6 million x $57
= $3,739.20 million

Computation of WACC as follows: Working note:


Market value Cost Weight WACC Compute cost of debt after tax as follows:
a b axb kd (after tax) = Kd (before tax) x (1-tax rate)
Debt $1,869.90 5.60% 0.333 1.87% = 8% x (1 -0.30)
Equity $3,739.20 12% 0.667 8.00% = 8% x 0.70
Total $5,608.80 1 9.87% = 5.60%
shares outstanding.
capitalization (value
ebt, what percentage
ble to equity? When
eights, compute the
the cost of equity is
cel.

Compute the weights as follows: Weight of equity = Equity value


ebt after tax as follows: Weight of debt = Debt value Total capital
(before tax) x (1-tax rate) Total capital = $3,739.20
% x (1 -0.30) = $1,869.90 $5,608.80
$5,608.80 = 0.667
= 0.333

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