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Q1.
The following multiple-choice questions all relate to cash flow or growth rate estimation. Please pick only one answer.
a. Yuma Inc. is a company with a history of losing money and has a net operating loss carried forward of $400 million. It expects to generate $ billion in taxable income next year and the marginal tax rate is 40%. How much will the company pay in taxes next year? i. $160 million ii. $240 million iii. $400 million iv. None of the above
b. Siago Pharmaceuticals is a mature company that has seen its R&D expenses decrease from $400 million five years ago to $200 million in the most recent year. The company reported operating income of $500 million in the most recent year. If you capitalize R&D expenses, which of the following would you expect to see happen to your adjusted numbers? i. Operating income will increase, FCFF will decrease ii. Operating income will decrease, FCFF will decrease iii. Operating income will increase, no change in FCFF iv. Operating income will decrease, no change in FCFF v. Operating income will increase, FCFF will increase vi. Operating income will decrease, FCFF will increase
c. Civitas Inc. is a manufacturing company. Last year, the company generated $80 million in EBITDA and reported $20 million in depreciation and amortization. The company also had $50 million in capital expenditures and reported that non-cash working capital increased from $15 to $25 million. If the tax rate is 25%, what is the reinvestment rate for the company? i. 50% ii. 66.67% iii. 75.00% iv. 88.89% v. 133.33%
d. Exim Inc. reported a return on capital of 12% on its existing assets and a reinvestment rate of 60% in the most recent year. It expects to improve its return on capital to 15% next year on both its existing and new investments, while maintaining its existing reinvestment rate. What will the expected growth rate be next year? i. 7.2% ii. 9.0% iii. 29.0% iv. 32.2%
v. 34.0%
Q
You have been asked to review the free cash flow to the firm computation made by an analyst for Stark Stores Inc., a small publicly traded retail company.
(in millions) (^) Notes Revenue $1,200.
- Operating Expenses $600.00 Includes $ 100 million in operating lease expenses. The firm has $ 80 million in lease commitments each year for the next 5 years and a pre-tax cost of debt of 5%. Operating Income $600.
- Interest Expenses $150. Taxable Income $450.
- Taxes $157.50 Paid marginal tax rate on taxable income Net Income $292.
- Cap Ex $200.00 Did not include stock based acquisition of $ million.
- Increase in Working Capital
$50.00 Includes an increase in the cash balance of $ 10 million Free cash flow to firm $142.
Estimate the correct free cash flow to the firm.
Q
You are trying to estimate the free cash flow to the firm on January 1, 2010, for a software company and have been provided with the following information for 2009 (all numbers in millions): Revenues $ 800
- Depreciation & Amortization $ 100
- R & D expenses $ 200
- Other operating expenses $ 200 Operating income $ 300
- Interest expenses $ 50 Taxable income $ 250
- Taxes paid $ 100 Net Income $ 150
You are also given the following information:
Q
Hannaford Enterprises reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $ 500 million in 1999. The firm had depreciation of $ 80 million and reported capital expenditures of $ 120 million. In addition, the firm acquired another firm for $ 150 million during 1999, and reported amortization of $ 40 million for the year. Finally, the firm’s total working capital increased from $ 80 million to $ 180 million, but half of this increase was due to an increase in the cash balance; the firm has no short term debt. If the firm has a tax rate of 40%, estimate the free cash flow to the firm.
Q
GNC Bank reported a net income of $ 150 million on a beginning book value of equity of $ 1.2 billion in 1999. The firm pays out $ 60 million in dividends, and bought back $ million of stock during the year.
a. Assuming that the firm’s return on equity and reinvestment rate remain the same in 2000, estimate the expected growth rate in 2000. b. The average return on equity for the industry is 15%. If GNC’s return on equity changes to match the industry average in 2000, estimate the expected growth rate in earnings in 2000.
Q8.
Consider a firm that has after-tax operating income of $1300, net income of $950, capital expenditures of $1235, depreciation of $900, acquisition costs of $90, a change in non-cash working capital of 125, and a debt-to-capital ratio of 40%. If the return on capital (ROC) for this firm is constant at 13%, what is the fundamental growth rate in operating income.
