Question 1

Shady Sunglasses operates retail sunglass kiosks in shopping malls.Below is information related to the company:
 $\begin{array}{l}
\begin{array}{lll}
  \text { (dollar amounts in thousands)}\
  \text { Net Cash Flow from Operations}\
  \text { Interest Expense after tax}\
  \text { Decrease (Increase) in Cash}\
  \text { Required for Operations}\
  \text { Net Cash Flow from Investing}\
  \text { Net Cash from Debt Financing}\
\
  \text { Present Value Factors }\left(\mathrm{R}_{e}=8.5 \%\right)\
\text { Common Shares Outstanding in thousands}\
\end{array}
\begin{array}{cccccc}
\underline {2012}&\underline {2013}&\underline {2014}&\underline {2015}&\underline {2016}&\underline {2017}\
564 & 628 & 854 & 1059 & 1345 & 1655 \
122 & 134 & 148 & 145 & 155 & 148 \
-75 & -54 & -48 & -32 & -61 & -48 \
\
-287 & -300 & -310 & -285 & -294 & -277 \
210 & 204 & 140 & 85 & -40 & -46\
\
0.922 & 0.849 & 0.783 & 0.722 & 0.665\
1512\
\end{array}
\end{array}$ 
Using the above information and assuming that steady-state growth in year 2017 and beyond will be 4% calculate Shady Sunglasses' current value per share.

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Question 2

Simpson Department Store
Simpson Department Stores operates retail department store chains throughout the United States.At the end of Year 10, Simpson reports debt of $5,897 million and common shareholders' equity at book value of $4,400 million.The market value of its common stock is $6,895, and its market equity beta is 0.79.An equity buyout group is considering an LBO of Simpson as of the beginning of Year 11.The group intends to finance the buyout with 25 percent common equity and 75 percent debt carrying an interest rate of 10.65 percent.
-Regarding the equity buyout,compute the cost of equity capital with the new capital structure that results from the LBO.Assume a risk-free rate of 3.75percent and a market risk premium of 5.0 percent.

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Simpson Department Stores operates retail...

Question 3

Simpson Department Store
Simpson Department Stores operates retail department store chains throughout the United States.At the end of Year 10, Simpson reports debt of $5,897 million and common shareholders' equity at book value of $4,400 million.The market value of its common stock is $6,895, and its market equity beta is 0.79.An equity buyout group is considering an LBO of Simpson as of the beginning of Year 11.The group intends to finance the buyout with 25 percent common equity and 75 percent debt carrying an interest rate of 10.65 percent.
-Regarding the equity buyout,compute the unlevered market equity (asset)beta of Simpson before consideration of the LBO.Assume that the book value of the debt equals its market value.The income
tax rate is 35 percent.

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Simpson Department Stores operates retail...

Question 4

Simpson Department Store
Simpson Department Stores operates retail department store chains throughout the United States.At the end of Year 10, Simpson reports debt of $5,897 million and common shareholders' equity at book value of $4,400 million.The market value of its common stock is $6,895, and its market equity beta is 0.79.An equity buyout group is considering an LBO of Simpson as of the beginning of Year 11.The group intends to finance the buyout with 25 percent common equity and 75 percent debt carrying an interest rate of 10.65 percent.
-Regarding the equity buyout,compute the weighted average cost of capital of the new capital structure.

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Simpson Department Stores operates retail...

Question 5

What is the purpose of a free cash flow analysis?

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Question 6

When should an analyst use nominal cash flows and when should an analyst use real cash flows?

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Question 7

Starting with free cash flows from operations,discuss how an analyst would measure free cash flows to common equity shareholders.

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Question 8

What three elements are needed to value a resource when using cash flows?

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Question 9

Currently,financial reporting does not take into account changes in prices,either at the general level or at the specific level.Many analysts believe that not taking price changes into account distorts the meaningfulness of financial reports.How do changing prices affect financial reports?

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Question 10

Explain "free" cash flows.Describe which types of cash flows are free and which are not.How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders?

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Question 11

Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.

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Question 12

Below is information from the statement of cash flow and income statement for Garland Products,Inc.for 2012 and 2011.Marketable securities represent investments of excess cash that Garland Products does not need for operations.Garland Products' tax rate is 35%.
 \(\begin{array}{l}

\begin{array}{lrr}
\text {Cash Flow Statement}\
\text {(in thousands)}\
\
&12 / 30 / 2012 &12 / 30 / 2011\ \
\text {Cash from operations}\
\text {Net cash provided by operations}&106,484&113,880\
\
\text { Cash from investments }\
\text { Increase) decrease in property \& plant } & -31,536 & -47,960 \
\text { Acquisition (disposition) of subsidiaries or other business } & -702 & -19 \
\text { Increase (decrease) in marketable securities } & -18,825 & 380,737 \
& & \
\text { Net cash provided by (used in) investing } & -51,063 & 332,758\
\
\text { Cash from financing }\
\text { ssuances (purchases) of equity shares } & -370 & -434,570 \
\text { ssuances (repayment) of debt } & -&-\
\text { ncrease (decrease) in bank, or other borrowings } & -25,000 & 25,000  \
\text { Dividends, other distributions } & -29,377 & -37,202 \
\
\text { Net cash provided by (used in) financing }&-54,747 & -446,772\
\
\text { Net change cash \& cash equivalents }&674 & -134 \ 
\text { Cash and cash equivalents at start of year }&3,255 & 3,389 \
\text { Cash and cash equivalents at year-end}& 3,929 & 3,255\
\
\text { Interest Revenue }&50&35\
\text { Interest paid }&394&1400\
\end{array}
\end{array}\) 
Using the above information calculate the amount of free cash flows for common equity shareholders for Garland Products for year 2012 and 2011.

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Question 13

Below is information from the statement of cash flow and income statement for Garland Products,Inc.for 2012 and 2011.Marketable securities represent investments of excess cash that Garland Products does not need for operations.Garland Products' tax rate is 35%.
 \(\begin{array}{l}

\begin{array}{lrr}
\text {Cash Flow Statement}\
\text {(in thousands)}\
\
&12 / 30 / 2012 &12 / 30 / 2011\ \
\text {Cash from operations}\
\text {Net cash provided by operations}&106,484&113,880\
\
\text { Cash from investments }\
\text { Increase) decrease in property \& plant } & -31,536 & -47,960 \
\text { Acquisition (disposition) of subsidiaries or other business } & -702 & -19 \
\text { Increase (decrease) in marketable securities } & -18,825 & 380,737 \
& & \
\text { Net cash provided by (used in) investing } & -51,063 & 332,758\
\
\text { Cash from financing }\
\text { ssuances (purchases) of equity shares } & -370 & -434,570 \
\text { ssuances (repayment) of debt } & -&-\
\text { ncrease (decrease) in bank, or other borrowings } & -25,000 & 25,000  \
\text { Dividends, other distributions } & -29,377 & -37,202 \
\
\text { Net cash provided by (used in) financing }&-54,747 & -446,772\
\
\text { Net change cash \& cash equivalents }&674 & -134 \ 
\text { Cash and cash equivalents at start of year }&3,255 & 3,389 \
\text { Cash and cash equivalents at year-end}& 3,929 & 3,255\
\
\text { Interest Revenue }&50&35\
\text { Interest paid }&394&1400\
\end{array}
\end{array}\) 
Using the above information calculate the amount of free cash flows to all debt and equity capital stakeholders for Garland Products for year 2012 and 2011.

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Question 14

Net income for the year for Tanglewood Inc.was $750,000,but the statement of cash flows reports that cash provided by operating activities was $860,000.Tanglewood also reported capital expenditures of $75,000 and paid dividends in the amount of $30,000.Compute Tanglewood's free cash flow.

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Question 15

Morgan Company reported the following items in 2013:
 $\begin{array}{|l|r|}
\hline \text { Net income } & \$ 50,000 \
\hline \text { Dividends paid } & 6,000 \
\hline \text { Increase in accounts receivable } & 12,000 \
\hline \text { Increase in accounts payable } & 8,000 \
\hline \text { Purchase of equipment (capital expenditure) } & 9,000 \
\hline \text { Depreciation expense } & 3,500 \
\hline \text { Issue of notes payable } & 15,000\
\hline
\end{array}$ 
Required:
Calculate the following:
(1)net cash provided by operating activities,
(2)the net change in cash during 2013,and
(3)free cash flow.

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Question 16

Provide the rationale for using expected free cash flow in valuation.

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Question 17

Shady Sunglasses operates retail sunglass kiosks in shopping malls.Below is information related to the company:
 $\begin{array}{l}
\begin{array}{lll}
  \text { (dollar amounts in thousands)}\
  \text { Net Cash Flow from Operations}\
  \text { Interest Expense after tax}\
  \text { Decrease (Increase) in Cash}\
  \text { Required for Operations}\
  \text { Net Cash Flow from Investing}\
  \text { Net Cash from Debt Financing}\
  \text { Present Value Factors (WACC =805\%)}\
\end{array}
\begin{array}{cccccc}
\underline {2012}&\underline {2013}&\underline {2014}&\underline {2015}&\underline {2016}&\underline {2017}\
564 & 628 & 854 & 1059 & 1345 & 1655 \
122 & 134 & 148 & 145 & 155 & 148 \
-75 & -54 & -48 & -32 & -61 & -48 \
\
-287 & -300 & -310 & -285 & -294 & -277 \
210 & 204 & 140 & 85 & -40 & -46\
0.922 & 0.849 & 0.783 & 0.722 & 0.665
\end{array}
\end{array}$ 
Using a five-year forecast horizon compute the sum of the present value of free cash flows accruing to all debt and common equity holders for years 2012 to 2016.

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Question 18

Shady Sunglasses operates retail sunglass kiosks in shopping malls.Below is information related to the company:
 
$\begin{array}{l}
\begin{array}{lll}
  \text { (dollar amounts in thousands)}\
  \text { Net Cash Flow from Operations}\
  \text { Interest Expense after tax}\
  \text { Decrease (Increase) in Cash}\
  \text { Required for Operations}\
  \text { Net Cash Flow from Investing}\
  \text { Net Cash from Debt Financing}\

\
  \text { Present Value Factors }\left(\mathrm{R}_{e}=8.5 \%\right)\

\end{array}
\begin{array}{lll}
\underline {2012}&\underline {2013}&\underline {2014}&\underline {2015}&\underline {2016}&\underline {2017}\
 564 & 628 & 854 & 1059 & 1345 & 1655 \
122 & 134 & 148 & 145 & 155 & 148 \
\
-75 & -54 & -48 & -32 & -61 & -48 \
-287 & -300 & -310 & -285 & -294 & -277 \
210 & 204 & 140 & 85 & -40 & -46 \

\
0.922 & 0.849 & 0.783 & 0.722 & 0.665 &\

\end{array}
\end{array}$ 
Using a five-year forecast horizon,compute the sum of the present value of free cash flows accruing to common equity holders for years 2012 to 2016.

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Question 19

The quarterly cash flows from operations for two computer companies are as follows:
 $\begin{array}{|l|c|c|c|c|c|}
\hline \text { (in Millions) } & 2012 & 2012 & 2012 & 2012 & 2013 \
\hline & \mathrm{Q} 1 & \mathrm{Q} 2 & \mathrm{Q} 3 & \mathrm{Q} 4 & \mathrm{Q} 1 \
\hline \text { Firm A } & \$ 406.1 & \$ 204.2 & \$ 729.1 & \$ 440.2 & \$ 587.8 \
\hline \text { Firm B } & \$ 136.7 & \$ 243.1 & \$ 708.2 & (\$ 87.90) & (\$ 161.4) \
\hline
\end{array}$ 
Required:
1)Explain why Firm B has more credit risk than Firm A.
2)Suppose that Firm B's cash flow was $200 million higher each quarter.Explain why Firm B might still be viewed as having higher credit risk than Firm A.

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Question 20

Clarmont Corporation engaged in the following cash transactions during 2012:
 $\begin{array}{|l|r|}
\hline\text { Sale of land and building } & 209,000 \
\hline \text { Purchase of treasury stock } & 35,000 \
\hline \text { Purchase of land } & 38,000 \
\hline \text { Payment of cash dividend } & 105,000 \
\hline \text { Purchase of equipment } & 54,000 \
\hline \text { Issuance of common stock } & 150,000 \
\hline \text { Retirement of bonds } & 97,500\
\hline
\end{array}$ 
Required:
What is Clarmont's free cash flow,assuming that it reported net cash provided by operating activities of $650,000?

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Quiz 12: Valuation: Cash-Flow-Based Approaches

What is the purpose of a free cash flow analysis?

When should an analyst use nominal cash flows and when should an analyst use real cash flows?

Starting with free cash flows from operations,discuss how an analyst would measure free cash flows to common equity shareholders.

What three elements are needed to value a resource when using cash flows?

Currently,financial reporting does not take into account changes in prices,either at the general level or at the specific level.Many analysts believe that not taking price changes into account distorts the meaningfulness of financial reports.How do changing prices affect financial reports?

Explain "free" cash flows.Describe which types of cash flows are free and which are not.How do free cash flows available for debt and equity stakeholders differ from free cash flows available for common equity shareholders?

Discuss under which scenario it is appropriate to use free cash flows for all debt and equity capital stakeholders.

Net income for the year for Tanglewood Inc.was $750,000,but the statement of cash flows reports that cash provided by operating activities was $860,000.Tanglewood also reported capital expenditures of $75,000 and paid dividends in the amount of $30,000.Compute Tanglewood's free cash flow.

Provide the rationale for using expected free cash flow in valuation.