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Fin 515

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Fin 515
FIN 515

14-1 Residual Distribution Model
Axel Telecommunications has a target capital structure that consists of 70% debt and 30% equity. The company anticipates that its capital budget for the upcoming year will be $3 million. If Axel reports net income of $2 million and follows a residual distribution model with all distributions as dividends, what will be its dividend payout ratio?

$410,000 (3000000/5000000)*1000000 – (500000/5000000)*1000000 - .05(6000000)(1-.07) .6*1000000 - .1*1000000 – 300000*.3 600000-100000-90000 =410000

(13-2) Value of Operations of Constant Growth Firm
EMC Corporation has never paid a dividend. Its current free cash flow of $400,000 is expected to grow at a constant rate of 5%. The weighted average cost of capital is WACC = 12%. Calculate EMC’s value o $6,000,000 (400000*1.05)/(.12-.05)

(13-3) Horizon Value
Current and projected free cash flows for Radell Global Operations are shown below. Growth is expected to be constant after 2012, and the weighted average cost of capital is 11%. What is the horizon (continuing) value at 2012? Actual Projected
2010 2011 2012 2013
$606.82 $667.50 $707.55 $750.00

$15,000 (in millions) (750-707.55)/707.55=6% 750/(11-6)

(13-4) EROIC and MVA of Constant Growth Firm
A company has capital of $200 million. It has an EROIC of 9%, forecasted constant growth of 5%, and a WACC of 10%. What is its value of operations? What is its intrinsic MVA?

VOA 160,000,000 200+[200*(.09-.10)]/(.10-.05) 200+ -40

MVA -40,000,000
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