FIN4424 Exam 2 Question 1 Cases 10 11 11 2 Will focus on not fully depreciated asset negative cost savings Sunk Costs do not included in cash flow analysis Will need to compute NPV IRR Cash Flows and MIRR and choose one Accept or Reject The focus is on the incremental cash flows from a project Cash Flow EBIT 1 Tax Rate Depreciation Change in Fixed Assets Change in Net Other Working Capital After Tax Salvage Value EBIT Sales COGS Labor Expense if applicable Utility Expense If Applicable Lease Expense If Applicable Depreciation Depreciation Fixed Asset Basis MACRS Rate Change in Fixed Assets Entered as positive number which is then subtracted out for cash flow calculations Amount equipment costs Net Other Working Capital NOWC Current Assets Current Liabilities or could be a percentage of revenues or could be given Use to calculate change from year to year Do NOT subtract interest expense or dividends when calculating cash flows Net Other Working Capital Case 9 NOWC Current Assets Current Liabilities Conservative means you will finance for your need of Working Capital up front instead of year to year aggressive Change in Working Capital is used for Capital Budgeting Aggressive Minimal level of inventory Minimizes costs Highest Return but Riskiest Uses short term financing to fund part of the Permanent assets Conservative Large inventory is maintained Negative Cost Savings Enter the amount in the expense category as a negative and when calculating the EBIT formula remember that a minus minus makes a positive so EBIT will increase Externalities A negative externality is positive so that when you subtract it you take it away from the cash flow and EBIT A positive externality is negative that way it is added like negative cost savings to the EBIT and Cash Flow Salvage Value If sold before it is fully depreciated then the effect is on the salvage value After Tax Salvage Value Sales Price Salvage Value Tax Rate Salvage Purchase Price Depreciation left Set Up Years 0 1 2 3 Sales Units Sold Sale Price COGS Labor Utility Lease Other Expenses Change in Fixed Assets Depreciation Depreciation Amount EBIT EBIT 1 Tax Rate Inventory A R A P Deferred Expenses Liabilities NOWC Current Assets Current Liabilities Change in NOWC from year to year Choose Conservative or Aggressive 2 Take the Enterprise Values of each company and dived by the EBIT or EBITDA and get an Average EV EBIT or EBITDA then average 3 Take the EBIT of the Company you are trying to find a share price for and multiply by the average EV EBIT or EBITDA for the other companies This is the Enterprise Value 4 Find the Market Value of Equity for the Company you are trying to find a share price for MV of Equity Enterprise Value from Step 3 Debt Minority Interest Preferred Stock Cash 5 Price Per Share MV of Equity Step 4 Shares Outstanding Given Order As Follows Horizontally EBIT EBITDA Debt Minority Interest Preferred Cash Share Price Shares Outstanding Enterprise Value Enterprise Value EBIT Average These Enterprise Value EBITDA Average These FIN4424 Exam 2 MIRR Formula Put all cash flows to the last period their future values and discounts them back Example 1 Enter positive CFs in CFLO I 10 Cost of Capital Solve for NPV 358 029 581 2 Use TVM keys PV 358 029 581 Net Present Value Calculated in Step 1 N 4 I 10 Cost of Capital PMT 0 Solve for FV 524 191 TV of inflows 3 Use TVM keys N 4 FV 524 191 PV 270 000 PMT 0 Solve for I 18 0 MIRR MIRR 18 0 Case 8 Question 2 Given NPV IRR MIRR and Choose One Mutually Exclusive choose one Independent means you can have this and a mutually exclusive event If NPV and IRR conflict go to an alternative measure Discounted Payback or the crossover rate How to Calculate Crossover Rate Question 3 1 Find the Differences between both of 2 Solve for the IRR Where Net Present the projects Value Zero rate 3 Make your decision based on cross over Question 4 Case 12 Comparable Companies Analysis 1 Find the Enterprise Value for each company Enterprise Value Market Price of Shares Shares Outstanding Debt Minority Interest Preferred Stock Cash