Question 1

Multiples analysis: Turner Corp. has debt of $230 million and generated a net income of $121 million in the last fiscal year. In attempting to determine the total value of the firm, an investor identified a similar firm in Jacobs, Inc., an all-equity firm. This firm had 150 million shares outstanding, a share price of $14.25, and net income of $182 million. What is the total value of Turner Corp.? Round to the nearest million dollars.

Accepted Answer

To determine the total value of Turner Corp., we need to use multiples analysis. We can use the price/earnings (P/E) ratio of Jacobs, Inc. since it is a similar firm and all-equity.

First, we need to calculate Jacobs, Inc.'s P/E ratio:

P/E ratio = Share Price / Earnings per share 
Earnings per share = net income / number of shares outstanding

Earnings per share = $182 million / 150 million = $1.21

P/E ratio = $14.25 / $1.21 = 11.78

Next, we can use Jacobs, Inc.'s P/E ratio to calculate the total value of Turner Corp.:

Total value of Turner Corp. = Net income x P/E ratio + Debt

Total value of Turner Corp. = $121 million x 11.78 + $230 million

Total value of Turner Corp. = $1,650.38 million

Rounding to the nearest million, the answer is $1,651 million, which is option B.

Question 2

Valuing private company: Keshav Sinha is interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, he estimates the value of the private company's stock to be $21.27 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 10 percent. Keshav estimates the marketability discount for such a firm to be 12 percent. The discount for the key person, one of the founders who may leave the firm upon Keshav's control of the firm, is 20 percent. What price should he be willing to pay for these shares?

Accepted Answer

To calculate the price Keshav should be willing to pay, adjust the estimated value per share for the control premium and then apply the marketability and key person discounts. Start with $21.27, add a 10% control premium ($21.27 * 1.10 = $23.40), then apply a 12% marketability discount ($23.40 * 0.88 = $20.59), and finally apply a 20% key person discount ($20.59 * 0.80 = $16.47).

Question 3

Multiples analysis: What is the value of Turnbull Corp's debt? Round to the nearest million dollars.

Accepted Answer

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Question 4

Valuing private company: Shane Bauer wants to invest in Trajectory Tech, a private company. Based on earnings multiples of similar publicly traded firms, Shane estimates the value of the private company's stock to be $18.97 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 12 percent. He estimates the marketability discount for such a firm to be 15 percent. The discount for the key person, one of the founders who may leave the firm upon Shane's control of the firm, is 15 percent. What price should he be willing to pay for these shares?

Accepted Answer

To calculate the price Shane should be willing to pay, adjust the estimated value per share for the control premium and subtract the marketability and key person discounts: $18.97 * (1 + 0.12) * (1 - 0.15) * (1 - 0.15) = $15.35.

Question 5

Break-even analysis: Jackson Electronics makes circuit boards and markets them to electronic goods manufacturers. The firm has nonsalary fixed costs of $212,000 and salary costs of $134,250. Each circuit board is sold at a price of $111.50 and involves variable costs of $81.73 per unit. What is the break-even point for Jackson?

Accepted Answer

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Question 6

Income approaches: You are valuing the equity of Cirona Corp. using the FCFE approach and have estimated that the FCFE in the next three years will grow at a 8 percent rate from last year's FCFE of $2.1 million. Beginning in year 4, you expect the cash flows to increase at a constant rate of 5 percent per year for the indefinite future. The cost of equity for the firm is10 percent. What is the value of equity in this company?

Accepted Answer

The value of equity is calculated by finding the present value of the expected future FCFE. First, calculate the FCFE for the first three years using the 8% growth rate, then calculate the terminal value at the end of year 3 using the 5% growth rate and the Gordon Growth Model. Finally, discount all cash flows back to the present value using the 10% cost of equity.

Question 7

Multiples analysis: What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.

Accepted Answer

The enterprise value can be calculated by subtracting the cash and cash equivalents from the market value of equity and adding the market value of debt. Using the information provided in the question, the market value of equity is $2,400 million, the market value of debt is $260 million, and the cash and cash equivalents are $873 million. Therefore, the enterprise value is:

EV = ($2,400 million + $260 million) - $873 million 
EV = $1,787 million

Rounding to the nearest million dollars gives us the answer of choice C, $1,787 million.

Question 8

Break-even analysis: Sherwin Furniture makes period pieces. The firm has total fixed costs of $632,750. The average piece is sold at a price of $2,125 and involves variable costs of $1,675 per unit. What is the break-even point for this firm?

Accepted Answer

The break-even point is calculated by dividing the total fixed costs by the contribution margin per unit (selling price per unit minus variable cost per unit). Here, it is $632,750 / ($2,125 - $1,675) = 1,406 units.

Question 9

Income approaches: Maryland Electronics, an electronics manufacturer, is expected to grow rapidly in the next five years and then have a stable growth rate for the foreseeable future. The firm expects free cash flows of $262.5 million next year. These cash flows are expected to grow at a 30 percent rate over the following four years, and thereafter its cash flows will grow at a steady rate of 6 percent per annum. The company has nonoperating assets (NOA) of $31 million in the form of cash.. If the appropriate WACC is 9 percent, what is the enterprise value of this business? Round to the nearest million.

Accepted Answer

The enterprise value is calculated by discounting the expected free cash flows at the WACC and adding the value of nonoperating assets. The cash flows grow at 30% for four years and then at 6% perpetually. The present value of these cash flows, when calculated, results in an enterprise value closest to $19,014 million.

Question 10

Adjusted BV: Sterling, Inc., has cash of $10,000, receivables of $31,250, and inventory of $27,445. In addition, the firm has fixed assets of $125,000. Management has also told you that you can reasonably expect to collect 91 percent of the receivables, that the inventory could be sold to realize 85 percent of its book value, and that the sale of the property, plant, and equipment would yield $96,100. What is the liquidation value of this company? Round to the nearest dollar.

Accepted Answer

The liquidation value is the sum of the cash, the net realizable value of the receivables, the net realizable value of the inventory, and the net realizable value of the fixed assets. The net realizable value of the receivables is 91% of $31,250, or $28,338. The net realizable value of the inventory is 85% of $27,445, or $23,373. The net realizable value of the fixed assets is $96,100. Therefore, the liquidation value is $10,000 + $28,338 + $23,373 + $96,100 = $157,811.

Question 11

Break-even analysis: Triad Electrical Supply Company needs to sell 3,500 circuit breakers to break even. Its unit variable cost is $341.50, and its unit selling price is $713.50. What is the fixed cost of this company?

Accepted Answer

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Question 12

Income approaches: Shenandoah Corp. is expected to grow rapidly in the next four years and then have a zero growth rate for the foreseeable future. The firm expects free cash flows of $42.5 million, $64.3 million, $77.1 million and $92 million over the next four years, and thereafter its cash flows will stay constant. The company has cash to the tune of $23.4 million. If the appropriate WACC is 10 percent, what is the enterprise value of this business? Round to the nearest million.

Accepted Answer

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Question 13

Break-even analysis: Johnstone Corp. wants to break even at 20,000 units on its only product. Its unit variable cost is $63.75, and its fixed cost is $742,000. What should be the company's unit selling price?

Accepted Answer

To break even, total revenue must equal total costs. The break-even point in units is given by Fixed Costs / (Selling Price - Variable Cost). Solving for the selling price: $742,000 / (Selling Price - $63.75) = 20,000. Solving this equation gives a selling price of $100.85.

Question 14

Income approaches: Rentech, Inc., a biotech firm, is expected to grow rapidly in the next three years and then have a level growth rate for the foreseeable future. The firm expects free cash flows of $342.5 million, $512.3 million, and $750 million over the next three years, and thereafter its cash flows will grow at a steady rate of 8 percent per annum. The company has no nonoperating assets (NOA). If the appropriate WACC is 11.25 percent, what is the enterprise value of this business? Round to the nearest million.

Accepted Answer

The correct answer is A.The enterprise value of the business is the sum of the present value of the free cash flows and the present value of the terminal value. The present value of the free cash flows is calculated as follows:PV of FCF = $342.5 million / (1 + 0.1125)^1 + $512.3 million / (1 + 0.1125)^2 + $750 million / (1 + 0.1125)^3 = $1,404.8 millionThe present value of the terminal value is calculated as follows:PV of TV = $750 million * (1 + 0.08) / (0.1125 - 0.08) = $17,762.2 millionThe enterprise value of the business is therefore:EV = PV of FCF + PV of TV = $1,404.8 million + $17,762.2 million = $19,367 million

Question 15

Income approaches: Quicksilver Software Co. is expected to grow rapidly in the next three years and then have no growth for the foreseeable future. The firm expects free cash flows of $9.1 million, $11.4 million, and $17.7 million over the next three years, and thereafter its cash flows will stay constant. The company has no nonoperating assets. If the appropriate WACC is 12 percent and debt of 44.5 million, what is the equity value of this business? Round to the nearest million.

Accepted Answer

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Question 16

Adjusted BV: Troy Corp. has cash of $24,250, receivables of $81,700, and inventory of $117,875. In addition, the firm has property, plant, and equipment of $152,000. Management has also told you that you can reasonably expect to collect 85 percent of the receivables, that the inventory could be sold to realize 80 percent of its book value, and that the sale of the property, plant, and equipment would yield $113,250. What is the liquidation value of this company? Round to the nearest dollar.

Accepted Answer

The liquidation value is calculated by summing the cash, 85% of receivables, 80% of inventory, and the sale value of property, plant, and equipment: $24,250 + (0.85 * $81,700) + (0.80 * $117,875) + $113,250 = $301,245.

Question 17

Break-even analysis: Trident, Inc., makes designer gold bracelets. Their annual costs include shop rent of $12,500, salaries for two jewelers of $118,000, design software costs of $10,000, and other overhead costs of $13,000. An average bracelet is priced at $5,500. It costs $2,000 in raw material, $1,250 in labor, and $250 in other expenses. What is the minimum number of bracelets that need to be sold to earn a profit?

Accepted Answer

The total fixed costs are $12,500 + $118,000 + $10,000 + $13,000 = $153,500. The contribution margin per bracelet is $5,500 - $2,000 - $1,250 - $250 = $2,000. Therefore, the minimum number of bracelets that need to be sold to earn a profit is $153,500 / $2,000 = 77.

Question 18

Valuing private company: You are interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, you estimate the value of the private company's stock to be $13.44 per share. You plan to acquire a majority of the shares in the company. The expected control premium is 12 percent, while the marketability discount for such a firm is 15 percent. The discount for the key person, one of the founders who may leave the firm upon your control of the firm, is 15 percent. What price should you be willing to pay for these shares?

Accepted Answer

The answer of Valuing private company: You are interested in...

Question 19

Income approaches: You are valuing the equity of a company using the FCFE approach and have estimated that the FCFE in the next three years will be $6.25, $7.70, and $8.36 million, respectively. Beginning in year 4, you expect the cash flows to increase at a rate of 4 percent per year for the indefinite future. You estimate that the cost of equity is 12 percent. What is the value of equity in this company?

Accepted Answer

First, we need to calculate the terminal value (TV) of the cash flows beginning in year 4. We can use the perpetuity formula:
TV = FCFE year 4 × (1 + g) ÷ (k - g)

where:
FCFE year 4 = $8.36 million
g = 4%
k = 12%

TV = $8.36 million × (1 + 4%) ÷ (12% - 4%) = $138.98 million

Next, we can calculate the present value of the cash flows and the terminal value using the formula:
PV = FCFE ÷ (1 + k)t + TV ÷ (1 + k)t

where:
FCFE = $6.25 million for year 1, $7.70 million for year 2, and $8.36 million for year 3
k = 12%
t = year 1, 2, 3, and infinity

PV year 1 = $6.25 million ÷ (1 + 12%)^1 = $5.58 million
PV year 2 = $7.70 million ÷ (1 + 12%)^2 = $6.32 million
PV year 3 = $8.36 million ÷ (1 + 12%)^3 = $6.28 million
PV TV = $138.98 million ÷ (1 + 12%)^3 = $95.00 million

Total PV = $5.58 million + $6.32 million + $6.28 million + $95.00 million = $113.18 million

Therefore, the value of equity in this company is $113.18 million. The closest option is B: $95 million.

Question 20

Income approaches: You are using the FCFF approach to value a business. The estimated FCFF for next year will be $13.6 million, and it will increase at a rate of 6 percent for each of the following five years. After that point, the FCFF will increase at a rate of 3 percent forever. If the WACC for this firm is 8 percent, what is it worth?

Accepted Answer

The correct answer is A because the FCFF approach is used to value a business by discounting the future cash flows back to the present at the WACC. The FCFF for next year is $13.6 million, and it will increase at a rate of 6 percent for each of the following five years. After that point, the FCFF will increase at a rate of 3 percent forever. The WACC for this firm is 8 percent. So, the value of the business is $301 million.

Quiz 18: Business Formation, Growth and Valuation

Multiples analysis: What is the value of Turnbull Corp's debt? Round to the nearest million dollars.

Multiples analysis: What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.

Break-even analysis: Sherwin Furniture makes period pieces. The firm has total fixed costs of $632,750. The average piece is sold at a price of $2,125 and involves variable costs of $1,675 per unit. What is the break-even point for this firm?

Break-even analysis: Triad Electrical Supply Company needs to sell 3,500 circuit breakers to break even. Its unit variable cost is $341.50, and its unit selling price is $713.50. What is the fixed cost of this company?

Break-even analysis: Johnstone Corp. wants to break even at 20,000 units on its only product. Its unit variable cost is $63.75, and its fixed cost is $742,000. What should be the company's unit selling price?