Q1) Watkins Inc.

has never paid a dividend, and it’s not known when the firm might begin paying dividends. Its
current free cash flow is $100,000, and this FCF is expected to grow at a constant 7% rate. The weighted
average cost of capital is WACC = 11%. Watkins currently holds $325,000 of non operating marketable
securities. Its long-term debt is $1,000,000, but it has never issued preferred stock. Watkins has 50,000
shares of stock outstanding.
a. Calculate Watkins’s value of operations.
b. Calculate the company’s total value.
c. Calculate the intrinsic value of its common equity.
d. Calculate the intrinsic per share stock price.

FCF= 100,000
g= 7%
WACC= 11%
Marketable Securities= 325,000
LTD= 1,000,000
Outstanding Shares= 50,000

a. Calculate Watkins’s value of operations:

Value of Operations= FCF (1 + g) / WACC - g

Value of Operations= 100,000 (1 + 7%) / 11% - 7%
Value of Operations= 2,675,000

b. Calculate the company’s total value:

Total Value= Value of oprations + non-operational marketable securities

Total Value= 2,675,000 + 325,000
Total Value= 3,000,000

c. Calculate the intrinsic value of its common equity:

Value of Equity= Total Value - Value of debt

Value of Equity= 3,000,000 - 1,000,000
Value of Equity= 2,000,000

d. Calculate the intrinsic per share stock price:

Value per share= Value of equity / Outstanding Shares

Value per share= 2,000,000 / 50,000
Value per share= 40
gin paying dividends. Its
% rate. The weighted
erating marketable
Watkins has 50,000
Problem # 1 Use the following income statements and balance sheets to calculate Garnet Inc.’s free cash flow

Income Statement 2010 2011

Net sales $500.0 $530.0
Costs (except depreciation) $380.0 $400.0
Depreciation $25.0 $30.0
Total operating costs $405.0 $430.0
Earnings before interest and taxes (EBIT) $95.0 $100.0
Less interest $21.0 $23.0
Earnings before taxes $74.0 $77.0
Taxes (40%) $29.6 $30.8
Net income $44.4 $46.2

Balance Sheet 2010 2011

Assets
Cash $27.0 $28.0
Marketable securities $66.0 $69.0
Accounts receivable $80.0 $84.0
Inventories $106.0 $112.0
Total current assets $279.0 $293.0
Net plant and equipment $265.0 $281.0
Total assets $544.0 $574.0
Liabilities and Equity
Accounts payable $52.0 $56.0
Notes payable $130.0 $138.0
Accruals $28.0 $28.0
Total current liabilities $210.0 $222.0
Long-term bonds $164.0 $173.0
Common stock $100.0 $100.0
Retained earnings $70.0 $79.0
Common equity $170.0 $179.0
Total liabilities and equity $544.0 $574.0
ate Garnet Inc.’s free cash flow for 2011.

Calculation of Free Cash Flow for 2011

2010 2011
Required net operating working capital $133.0 $140.0
Required net plant & equipment $265.0 $281.0
Required net operating capital $398.0 $421.0
Required net new investment in operating capital $23.0
(Current - Previous Required net operating capital)
NOPAT $60.0
Less: Required net new investment in operating capital $23.0
Free Cash Flow $37.0
Problem # 2 EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow
a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value o

FCF= 400,000
g= 5%
WACC= 12%
Value of Operations (Vop)= ?

Value of Operations (Vop)= FCF (1+g) / WACC - g

Value of Operations (Vop)= 400,000 (1+5%) / 12% - 5%
Value of Operations (Vop)= 6,000,000
00,000 is expected to grow at
%. Calculate EMC’s value of operations.
Problem # 3 Current and projected free cash flows for Radell Global Operations are shown below. Growth is expec
after 2012, and the weighted average cost of capital is 11%. What is the horizon (continuing) value at
Actual Projected
2010 2011 2012
Free cash flow (millions of dollars) $606.82 $667.50 $707.55
WACC= 11%

g= 6.00%
Vop(2012)= 14,998.73
re shown below. Growth is expected to be constant
the horizon (continuing) value at 2012?
Projected
2013
$750.00
Problem # 4 Brooks Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and $100,000
2 years, respectively; after the second year, FCF is expected to grow at a constant rate of 8%. The com
weighted average cost of capital is 12%.
a. What is the terminal, or horizon, value of operations?
b. Calculate the value of Brooks’s operations.

Year 1 Year 2
FCF Projected= 80,000 100,000
g= 8% constant after second year
WACC= 12%

a) Vop(after Year 2)= 2,700,000

b) Year Value DF Vop

FCF 1 80,000 (1.12)^-1 71,428.57
FCF 2 100,000 (1.12)^-2 79,719.39
Vop(after Year 2) 2 2,700,000 (1.12)^-2 2,152,423.47
2,303,571.43
d to be $80,000 and $100,000 for the next
constant rate of 8%. The company’s
Problem # 5 Dozier Corporation is a fast-growing supplier of office products. Analysts project the following free cas
during the next 3 years, after which FCF is expected to grow at a constant 7% rate. Dozier’s weighted average c
Year 1 2 3
Free cash flow ($ millions) ($20) $30 $40

a. What is Dozier’s terminal, or horizon, value? (Hint: Find the value of all free cash flows beyond Yea
b. What is the current value of operations for Dozier?
c. Suppose Dozier has $10 million in marketable securities, $100 million in debt, and 10 million shares

g= 7% constant after 3rd year

WACC= 13%

a) Vop (after Year 3)= 713.33

b) Year Value DF Vop

FCF 1 -20.00 (1.13)^-1 (17.70)
FCF 2 30.00 (1.13)^-2 23.49
FCF 3 40.00 (1.13)^-3 27.72
Vop(after Year 2) 3 713.33 (1.13)^-3 494.38
527.89

c) Marketable Securities = 10,000,000

Debt = 100,000,000
Outstanding Shares = 10,000,000

Value of Equity= (Value of Operations + marketable securities) - Value of debt

Value of Equity= 527,890,000 + 10,000,000 - 100,000,000
Value of Equity= 437,893,074.37
intrinsic price per share= Value of Equity / Outstanding Shares
intrinsic price per share= 437,893,074.37 / 10,000,000
intrinsic price per share= 43.79
project the following free cash flows (FCFs)
e. Dozier’s weighted average cost of capital is WACC = 13%.

free cash flows beyond Year 3 discounted back to Year 3.)

n debt, and 10 million shares of stock. What is the intrinsic price per share?

- Value of debt
Problem # 6 The balance sheet of Hutter Amalgamated is shown below. If the 12/31/2010 value of operations is $
what is the 12/31/2010 intrinsic market value of equity?

Balance Sheet, December 31, 2010

(Mill ions of Dollars)
Assets Liabilities and Equity
Cash 20.0 Accounts payable 19.0
Marketable securities 77.0 Notes payable 151.0
Accounts receivable 100.0 Accruals 51.0
Inventories 200.0 Total current liabilities 221.0
Total current assets 397.0 Long-term bonds 190.0
Net plant and equipment 279.0 Preferred stock 76.0
Common stock (par plus PIC) 100.0
Retained earnings 89.0
Common equity 189.0
Total assets $676.0 Total liabilities and equity $676.0

Value of Equity= (Value of Operations + marketable securities) - (Value of debt + Value of Prefere
Value of Equity= 756 + 77 - (190+151) - 76
Value of Equity= 416.0 million
alue of operations is $756 million,

ebt + Value of Prefered Stock)

Problem #7 The balance sheet of Roop Industries is shown below. The 12/31/2010 value of operations is $651 mil
and there are 10 million shares of common equity. What is the intrinsic price per share?

Balance Sheet, December 31, 2010

(Millions of Dollars)
Assets Liabilities and Equity
Cash 20.0 Accounts payable 19.0
Marketable securities 47.0 Notes payable 65.0
Accounts receivable 100.0 Accruals 51.0
Inventories 200.0 Total current liabilities 135.0
Total current assets 367.0 Long-term bonds 131.0
Net plant and equipment 279.0 Preferred stock 33.0
Common stock (par plus PIC) 160.0
Retained earnings 187.0
Common equity 347.0
Total assets $646.0 Total liabilities and equity $646.0

Value of Equity= (Value of Operations + marketable securities) - (Value of debt + Value o

Value of Equity= (651 + 47) - ((131 + 65) + 33)
Value of Equity= 469.0
intrinsic price per share= Value of Equity / Outstanding Shares
intrinsic price per share= 469 / 10
intrinsic price per share= 46.90
of operations is $651 million,
per share?

- (Value of debt + Value of Prefered Stock)

Problem # 8 The financial statements of Lioi Steel Fabricators are shown below—both the actual results for 2010
the projections for 2011. Free cash flow is expected to grow at a 6% rate after 2011. The weighted av
cost of capital is 11%.
a. If operating capital as of 12/31/2010 is $502.2 million, what is the free cash flow for 12/31/2011?
b. What is the horizon value as of 12/31/2011?
c. What is the value of operations as of 12/31/2010?
d. What is the total value of the company as of 12/31/2010?
e. What is the intrinsic price per share for 12/31/2010?

Income Statements for the Year Ending December 31

(Millions of Dollars Except for Per Share Data)
Actual 2010 Projected 2011
Net sales $500.0 $530.0
Costs (except depreciation) 360.0 381.6
Depreciation 37.5 39.8
Total operating costs $397.5 $421.4
Earnings before interest and taxes $102.5 $108.6
Less interest 13.9 16.0
Earnings before taxes $88.6 $92.6
Taxes (40%) 35.4 37.0
Net income before preferred dividends $53.2 $55.6
Preferred dividends $6.0 $7.4
Net income available for common dividends $47.2 $48.2
Common dividends $40.8 $29.7
Addition to retained earnings $6.4 $18.5
Number of shares 10.0 10.0
Dividends per share $4.1 $3.0

Balance Sheets for December 31

(Millions of Dollars)
Actual 2010 Projected 2011
Assets
Cash $5.3 $5.6
Marketable securities 49.90 51.90
Accounts receivable 53.00 56.20
Inventories 106.00 112.40
Total current assets $214.2 $226.1
Net plant and equipment 375.0 397.5
Total assets $589.2 $623.6
Liabilities and Equity
Accounts payable $9.6 $11.2
Notes payable 69.9 74.1
Accruals 27.5 28.1
Total current liabilities $107.0 $113.4
Long-term bonds $140.8 $148.2
Preferred stock $35.0 $37.1
Common stock (par plus PIC) $160.0 $160.0
Retained earnings $146.4 $164.9
Common equity $306.4 $324.9
Total liabilities and equity $589.2 $623.6
h the actual results for 2010 and
after 2011. The weighted average

cash flow for 12/31/2011?

1 g= 6% constant after 2011

WACC= 11%
Projected 2011
a) Calculation of Free Cash Flow for 12/31/2011 (in million)
2010 2011
Required net operating working capital - $134.9
Required net plant & equipment - $397.5
Required net operating capital $502.2 $532.4
Required net new investment in operating capital $30.2
NOPAT $65.2
Less: Required net new investment in operating capital $30.2
Free Cash Flow $34.96

b) Vop (as of 12/31/2011) = 741.15

c) Year Value DF Vop

FCF 2011 35.0 (1.11)^-1 31.50
Vop (as of 12/31/2011) 2011 741.2 (1.11)^-1 667.70
Vop (as of 12/31/2010) = 699.20

Projected 2011 d) Total Value= Value of oprations + non-operatind marketable securities

Total Value= 699.20 + 49.90
Total Value= 749.10

e) Value of Equity= Total Value - (Value of debt + Value of Prefered Stock)

Value of Equity= 749 - ((140.8 + 69.9) + 35)
Value of Equity= 503.30
intrinsic price per share= Value of Equity / Outstanding Shares
intrinsic price per share= 503.3 / 10
intrinsic price per share= 50.33
efered Stock)