Question

JINGHUA 2018 and 2019 Partial Balance Sheets Assets Liabilities and Owners’ Equity 2018 2019 2018 2019 Current assets $ 3,700 $ 4,200 Current liabilities $ 1,480 $ 1,720 Net fixed assets 15,700 18,240 Long-term debt 8,000 8,600 Equity 9,920 12,120 JINGHUA 2019 Income Statement Info Sales $ 22,600 Costs 11,000 Depreciation 2,000 Interest paid 400 The tax rate is 35%. Long term debt trades at 125% 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%.

9) What is the Net Income for 2019? $______

10) What is the Free Cash Flow to the Firm for 2019? $______

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

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

13) What is the Free Cash Flow to Equity for 2019? $______

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

Answer 1

9).Net Income = (Sales - Costs - Depreciation - Interest) x (1 - tax)

= (22,600 - 11,000 - 2,000 - 400) x (1 - 35%)

= $5,980

10).FCFF = (Sales - Costs - Depreciation) x (1 - tax) + Depreciation - FCInv - WCInv

= (22,600 - 11,000 - 2,000) x (1 - 35%) + 2000 - (18240 - 15700) - {(4200 - 1720) - (3700 - 1480)}

= $5,440

11).Value of firm = FCFF x (1 = g) / (WACC - g)

= 5,440 x (1 + 2%) / (16% - 2%)

= $39,634.29

12).Stock Price = (Value of firm - Debt) / No. of shares

= (39,634.29 - 8,600) / 500

= $62.07

14).FCFE = NI + Depreciation - FCInv - WCInv + net borrowing

= 5,980 + 2,000 - (18240 - 15700) - {(4200 - 1720) - (3700 - 1480)} + (8600 - 8000)

= 5,780

15).Stock Price = FCFE x (1 + g) / (r - g) / No. of shares

= 5,780 x (1 + 2%) / (24% - 2%) / 500

= $53.60