THREE FINANCE QS (REQUIRES DETAILED CALC USING EXCEL).
Question 1: Corporate Valuation
You have been hired as a consultant to Advanced Fuels Corporation, to find a way to
increase its value to the shareholders. The CEO has asked you to determine the value of a
privately held company that Advanced Fuels is considering to acquire. You design your
presentation to the CEO on defining and determining the following items:
(a). What are assets‐in‐place? How can their value be determined?
(b). What are nonoperating assets? How can their value be determined?
©. What is the total value of a corporation? Who has claims on this value?
d). The privately held company is owned by a family, 10 million shares of stock. Free Cash
Flow of this company is $20 million, its WACC is 12%, and FCF is expected to grow at a
constant annual rate of 7%. The company has holdings in marketable securities of $90
million. It is financed with $200 million of debt, $250 million of book common equity.
1. What is the value of operations?
2. What is the total corporate value?
3. What is the intrinsic value of equity?
4. What is the intrinsic stock price per share?
5. What would be a fair offer price (per share) to this company? Explain.
e). List the six potential managerial behaviors that can harm a firm’s value?
Question 2: Dividend Distribution
(a). Mortal Inc. expects to have a capital budget of $500,000 next year. The company
wants to maintain a target capital structure with 30% debt and 70% equity, and its
forecasted net income is $400,000. If the company follows the residual dividend policy,
how much in dividends, if any, will it pay?
(b). Pavlin Corp.’s projected capital budget is $2,000,000, its target capital structure is 40%
debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a
residual dividend policy, how much dividends will it pay or, alternatively, how much new
stock must it issue?
Question 3 Capital Structure Decisions
The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of
perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and
taxes (EBIT) are $100,000, and it is a zero growth company. AJC’s current cost of equity is
8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding
selling at a price per share of $60.00.
(a). What is AJC’s current total market value and weighted average cost of capital?
(b). The firm is considering moving to a capital structure that is comprised of 40% debt
and 60% equity, based on market values. The new funds would be used to replace the old
debt and to repurchase stock. It is estimated that the increase in risk resulting from the
additional leverage would cause the required rate of return on debt to rise to 7%, while the
required rate of return on equity would rise to 9.5%. If this plan were carried out, what
would be AJC’s new WACC and total value? Hint: V= FCF/WACC
You have been hired as a consultant to Advanced Fuels Corporation, to find a way to
increase its value to the shareholders. The CEO has asked you to determine the value of a
privately held company that Advanced Fuels is considering to acquire. You design your
presentation to the CEO on defining and determining the following items:
(a). What are assets‐in‐place? How can their value be determined?
(b). What are nonoperating assets? How can their value be determined?
©. What is the total value of a corporation? Who has claims on this value?
d). The privately held company is owned by a family, 10 million shares of stock. Free Cash
Flow of this company is $20 million, its WACC is 12%, and FCF is expected to grow at a
constant annual rate of 7%. The company has holdings in marketable securities of $90
million. It is financed with $200 million of debt, $250 million of book common equity.
1. What is the value of operations?
2. What is the total corporate value?
3. What is the intrinsic value of equity?
4. What is the intrinsic stock price per share?
5. What would be a fair offer price (per share) to this company? Explain.
e). List the six potential managerial behaviors that can harm a firm’s value?
Question 2: Dividend Distribution
(a). Mortal Inc. expects to have a capital budget of $500,000 next year. The company
wants to maintain a target capital structure with 30% debt and 70% equity, and its
forecasted net income is $400,000. If the company follows the residual dividend policy,
how much in dividends, if any, will it pay?
(b). Pavlin Corp.’s projected capital budget is $2,000,000, its target capital structure is 40%
debt and 60% equity, and its forecasted net income is $1,000,000. If the company follows a
residual dividend policy, how much dividends will it pay or, alternatively, how much new
stock must it issue?
Question 3 Capital Structure Decisions
The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of
perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and
taxes (EBIT) are $100,000, and it is a zero growth company. AJC’s current cost of equity is
8.8%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding
selling at a price per share of $60.00.
(a). What is AJC’s current total market value and weighted average cost of capital?
(b). The firm is considering moving to a capital structure that is comprised of 40% debt
and 60% equity, based on market values. The new funds would be used to replace the old
debt and to repurchase stock. It is estimated that the increase in risk resulting from the
additional leverage would cause the required rate of return on debt to rise to 7%, while the
required rate of return on equity would rise to 9.5%. If this plan were carried out, what
would be AJC’s new WACC and total value? Hint: V= FCF/WACC
