PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 12, Problem 20PS
a)
Summary Introduction
To determine: Economic value added (EVA).
b)
Summary Introduction
To determine: Economic value added (EVA).
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You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future
investments in new plant and working capital:
Earnings before interest, taxes, depreciation, and amortization (EBITDA)
Depreciation
Pretax profit
Tax at 30%
Investment
Answer is complete but not entirely correct.
a. Total value
b. Laputa's equity
$ 70
30
$
40
12
9
428
257 X
Year
2
$90
40
50
15
12
3
$105
From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed
60% by equity and 40 % by debt. Its cost of equity is 11%, its debt yields 7%, and it pays corporate tax at 30%.
45
60
a. Estimate the company's total value..
Note: Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole amount.
b. What is the value of Laputa's equity?
Note: Do not round intermediate calculations. Enter your answer in millions rounded to the nearest whole amount.…
man.2
Orca Industries is considering the purchase of Shark Manufacturing. Shark is currently a supplier for Orca and the acquisition would allow Orca to better control its material supply. The current cash flow from assets for Shark is $6.9 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The costs of capital for Orca and Shark are 13 percent and 11 percent, respectively. Shark currently has 3 million shares of stock outstanding and $25 million in debt outstanding.
What is the maximum price per share Orca should pay for Shark? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
d. From your answers to parts a-c, which project would be selected?
↑
If the WACC was 18%, which project would be selected?
î
e. Construct NPV profiles for Projects A and B. Round your answers to the nearest cent. Do not round your intermediate calculations. Negative value
should be indicated by a minus sign.
Discount Rate
0%
Project B:
5
10
12
15
18.1
23.97
%
NPV Project A
$
%
$
%
$
$
f. Calculate the crossover rate where the two projects' NPVs are equal. Round your answer to two decimal places. Do not round your intermediate
calculations.
NPV Project B
$
+A
g. What is each project's MIRR at a WACC of 18%? Round your answer to two decimal places. Do not round your intermediate calculations.
Project A:
tA
Chapter 12 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 12 - Terminology Define the following: a. Agency costs...Ch. 12 - Prob. 2PSCh. 12 - Prob. 3PSCh. 12 - Prob. 4PSCh. 12 - Prob. 5PSCh. 12 - Prob. 6PSCh. 12 - Management compensation We noted that management...Ch. 12 - Prob. 8PSCh. 12 - Prob. 9PSCh. 12 - Prob. 10PS
Ch. 12 - Prob. 11PSCh. 12 - Economic income Fill in the blanks: A projects...Ch. 12 - Economic income Consider the following project:...Ch. 12 - Accounting measures of performance Use the Beyond...Ch. 12 - Accounting measures of performance The Modern...Ch. 12 - Prob. 17PSCh. 12 - EVA Here are several questions about economic...Ch. 12 - EVA Herbal Resources is a small but profitable...Ch. 12 - Prob. 20PSCh. 12 - EVA Use the Beyond the Page feature to access the...Ch. 12 - EVA Ohio Building Products (OBP) is considering...
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