Reference no: EM13381200

Question 1: A financial analyst forecasts the financial statements of Jim & Brothers, Inc., a small grocery store. The three-year forecast of items in the financial statements are in the table below. Based on the forecast information, calculate the free cash flow for years 1 through 3. The tax rate is 40%.

			$ millons
Year	0	1	2	3
Sales	$100.00	$110.00	$117.70	$121.23
Cost of goods sold	$65.00	$71.50	$76.51	$78.80
Selling, general and administrative expenses	$15.00	$16.50	$17.66	$18.18
Depreciation	$10.00	$11.00	$11.77	$12.12
Interest payment on debt	$2.00	$2.50	$3.00	$3.50
Capital expenditure	$5.00	$5.50	$5.89	$6.06
Current assets	$10.00	$11.00	$11.77	$12.12
Current liabilities	$8.00	$8.80	$9.42	$9.70
FREE CASH FLOW

Question 2: The top three members of the management team of an electronic firm purchased the company with their own personal fund and $100 million borrowing. The interest on the loan was 11% and the loan is to be paid off annually by $25 million so that by the end of year 4 the loan will be fully paid off. The unlevered cost of equity for the firm is estimated at 12% and the tax rate is 35%. The free cash flows are estimated for the next four years as follows: $50 million in year 1, $55 million in year 2, $58 million in year 3, and $60 million in year 4. The cash flow is expected to grow at 3% per year after the fourth year. Estimate the value of the firm as of year 0 using the APV valuation method.

Question 3:

(A) Estimate the WACC for Kim's GV Dry Cleaner, Inc. with the following information:

Total value of equity: $1.5 milion;

Value of debt: $1 million;

Cost of debt: 10%;

10-year Treasury bond yield: 4%;

Market risk premium: 6%;

Beta for the levered equity: 1.2;

Tax rate: 40%

(B) One year later, the firm lowered the debt ratio to 20% (D/V=20%) and the cost of debt increased to 12%. Assuming everything else remained the same, estimate the new WACC.