Part II: Numerical answers Assume the following data for given firm in a given y

Question

Part II: Numerical answers

Assume the following data for given firm in a given year: after-tax EBIT is $7 million; depreciation is $2 million; incremental investment in fixed assets is $5 million; incremental investment in working capital is $4 million. What is its free cash flow?

Questions 12 to 15 refer to the following project (all cash flows occur at the end of the period). The firm has a WACC = .1.

Year

Cash flow after taxes

Is this an acceptable project using the NPV rule?

Is this an acceptable project using the IRR rule?

What annual future cash flow would make the NPV exactly zero (assume as before that the future cash flows are an annuity)?

If the project’s positive cash flows were all delayed by one year, by how much would the NPV decrease?

Assume Chen and Beck are two Japanese firms of comparable size in the igloo building industry. Both have a 30% tax rate. Chen has zero debt, a beta of 1.2 and Beck has a beta of 1.5. Estimate Beck’s .debt-to-equity ratio.

Assume you have $2,000 per month to pay your mortgage payment. Assume the monthly mortgage rate =.4%. The maturity of the mortgage is 30 years. How large a mortgage can you afford?

Year

Cash flow after taxes

Explanation / Answer

1)

($ in million) After tax EBIT $                  7.00 Add: Depreciation $                  2.00 Total cash available $                  9.00 Less: Increase in fixed assets $                  5.00 Increase in working capital $                  4.00 Total used cash $                  9.00 Free cash flows $                      0

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