Find Operating Cash Flow (OCF) annually first ten years and terminal phase, with the following information: Projected Unit Sales Growth (as a percentage of previous year level) FY1 492,236 Units FY2 8.52% FY3 8.52% FY4 8.52% FY5 8.52% FY6 4.26% FY7 4.26% FY8 4.26% FY9 4.26% FY10 4.26% Terminal 2.85% Sales: With the assistance of a market research firm, sales (in units) are projected to come in at be 492,236 in the first year; grow by 8.52% for years 2 through 5; and increase its growth to 4.26% for years 6 through 10. Due to operational constraints and a philosophy of wanting to focus on graphics processors, MGNS produces a single product: Electron e13 Processor Chip. Unit pricing of the chip is $329 in the current year and is projected to rise 4.57% years 2 through 5 and 2.25% for years 6 through 10. Costs (Variable and Fixed): Variable cost in the first year come in at $156/unit which is expected to grow 3.24% for years 2 through 5 and 4.92% for years 6 through 10. Fixed costs start off in year one at $5,312,975 and follows the same time path as variable costs. Growth in fixed costs are anticipated to be 3.22% for years 2 through 5 and 3.87% for years 6 through 10. MGNS is contemplating structural changes to increase operating leverage, but no plans have currently been finalized. Capital Expenditures & Depreciation: Necessary capital expenditures at year 0 for MGNS are expected to be $17,532,107 based on currently approved capital budgeting projects which reflect corporate strategy. MGNS expects with high probability capital expenditures of $2,019,319 in FY1 and $1,129,472 in FY2 as necessary investments to support the infrastructure and growth of its flagship product-the Electron e13 Processor Chip. According to IRS tax regulations, capital expenditures for the e13 Processor Chip project are required to be depreciated beginning in the year following the year of investment according to the 5-year MACRS schedule. In the terminal phase of growth, investment strategy is anticipated to change to that of a maintenance orientation in support of residual future marketing opportunities presently unknown to the company. As such, the average depreciation charge per year of $789,134 following a straight-line depreciation method is anticipated with an on-going 3-year time horizon strategy. Working Capital: Working capital is projected to start at $0 in year 0, but require an investment approximating 12.257% of revenues each year through the end of year 5. Starting in year 6 the anticipated necessary investment in working capital is projected to fall to 6.37% of revenues which is expected to last through year 10. Miscellaneous: MGNS’s applicable tax rate is the current marginal corporate income tax rate set forth in the IRS tax code. You are tasked with researching this tax rate. Starting in the terminal phase, Free Cash Flow is expected to grow by the 1.75% indefinitely. MGNS’s debt/equity ratio is 0.45. Total debt is $37,318,100 with maturity in FY8; but in year 6 (start of year), MGNS plans to issue $258,913,500 of mortgage debt with a maturity of ten years to expand e13 Project capacity. MGNS’s operational business risk structure requires the company to currently pay a 2.25% premium to the benchmark U.S. 10-year Treasury risk-free rate for longer term debt issuance. The company is conservatively estimating no change in its credit rating nor risk premium at the time of its anticipated debt offering. The risk-free rate: U.S.10-year Treasury note yield on the date of your valuation which is expected to be 1.05%. The expected market return (S&P 500) is the long-term realized rate of return on the S&P 500 index which is assumed to be 10.25%. The median equity beta for the semiconductor industry to be used as a proxy for MGNS’s equity beta; this is assumed to be 1.57 Upon MGNS’s IPO, 21,750,000 shares of common stock will be issued, of which none will be held in lock-up by current management.
Find Operating Cash Flow (OCF) annually first ten years and terminal phase, with the following information:
|
Projected Unit Sales Growth (as a percentage of previous year level) |
||
|
FY1 |
492,236 Units |
|
|
FY2 |
8.52% |
|
|
FY3 |
8.52% |
|
|
FY4 |
8.52% |
|
|
FY5 |
8.52% |
|
|
FY6 |
4.26% |
|
|
FY7 |
4.26% |
|
|
FY8 |
4.26% |
|
|
FY9 |
4.26% |
|
|
FY10 |
4.26% |
|
|
Terminal |
2.85% |
Sales: With the assistance of a
Costs (Variable and Fixed): Variable cost in the first year come in at $156/unit which is expected to grow 3.24% for years 2 through 5 and 4.92% for years 6 through 10.
Fixed costs start off in year one at $5,312,975 and follows the same time path as variable costs. Growth in fixed costs are anticipated to be 3.22% for years 2 through 5 and 3.87% for years 6 through 10.
MGNS is contemplating structural changes to increase operating leverage, but no plans have currently been finalized.
Capital Expenditures & Depreciation: Necessary capital expenditures at year 0 for MGNS are expected to be $17,532,107 based on currently approved capital budgeting projects which reflect corporate strategy. MGNS expects with high probability capital expenditures of $2,019,319 in FY1 and $1,129,472 in FY2 as necessary investments to support the infrastructure and growth of its flagship product-the Electron e13 Processor Chip.
According to IRS tax regulations, capital expenditures for the e13 Processor Chip project are required to be
Working Capital: Working capital is projected to start at $0 in year 0, but require an investment approximating 12.257% of revenues each year through the end of year 5. Starting in year 6 the anticipated necessary investment in working capital is projected to fall to 6.37% of revenues which is expected to last through year 10.
Miscellaneous: MGNS’s applicable tax rate is the current marginal corporate income tax rate set forth in the IRS tax code. You are tasked with researching this tax rate.
Starting in the terminal phase,
MGNS’s debt/equity ratio is 0.45.
Total debt is $37,318,100 with maturity in FY8; but in year 6 (start of year), MGNS plans to issue $258,913,500 of mortgage debt with a maturity of ten years to expand e13 Project capacity. MGNS’s operational business risk structure requires the company to currently pay a 2.25% premium to the benchmark U.S. 10-year Treasury risk-free rate for longer term debt issuance. The company is conservatively estimating no change in its credit rating nor risk premium at the time of its anticipated debt offering.
The risk-free rate: U.S.10-year Treasury note yield on the date of your valuation which is expected to be 1.05%.
The expected market return (S&P 500) is the long-term realized
The median equity beta for the semiconductor industry to be used as a proxy for MGNS’s equity beta; this is assumed to be 1.57
Upon MGNS’s IPO, 21,750,000 shares of common stock will be issued, of which none will be held in lock-up by current management.
Step by step
Solved in 2 steps
