Valuation case study
Finance 7A10
Solutions: End-of-Chapter questions
Chapter 7 (2nd Edition)
Questions are: 2, 9, 15
7-2. Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales of the Mini Mochi Munch by $9 million this year and by $7 million next year. In addition, the company expects that new consumers who try the Mini Mochi Munch will be more likely to try Kokomochi’s other products. As a result, sales of other products are expected to rise by $2 million each year.
Kokomochi’s gross profit margin for the Mini Mochi Munch is 35%, and its gross profit margin averages 25% for all other products. The company’s marginal corporate tax rate is 35% both this year and next year. What are the incremental earnings associated with the advertising campaign?
A
B
C
D
E
1
Year 1 2
2
Incre
1
2
3
4
5
6
7
8
9
mental Earnings Forecast ($000s)
Sales of Mini Mochi Munch 9,000 7,000
Other Sales 2,000 2,000
Cost of Goods Sold (7,350) (6,050)
3
4
5
6
Gross Profit 3,650 2,950
Selling, General & Admin. (5,000) - Depreciation - -
7
8
9
EBIT (1,350) 2,950
Income tax at 35% 473 (1,033)
10
11
Unlevered Net Income (878) 1,918
7-9. Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars):
a. What are the incremental earnings for this project for years 1 and 2?
b. What are the free cash flows for this project for the first two years?
a.
Year 1
2
Increm ental Earnings Forecast ($000s)
1
Sales
125.0
160.0
2
Costs of good sold and operating expenses other than depreciation
(40.0)
(60.0)
3
Solutions: End-of-Chapter questions
Chapter 7 (2nd Edition)
Questions are: 2, 9, 15
7-2. Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales of the Mini Mochi Munch by $9 million this year and by $7 million next year. In addition, the company expects that new consumers who try the Mini Mochi Munch will be more likely to try Kokomochi’s other products. As a result, sales of other products are expected to rise by $2 million each year.
Kokomochi’s gross profit margin for the Mini Mochi Munch is 35%, and its gross profit margin averages 25% for all other products. The company’s marginal corporate tax rate is 35% both this year and next year. What are the incremental earnings associated with the advertising campaign?
A
B
C
D
E
1
Year 1 2
2
Incre
1
2
3
4
5
6
7
8
9
mental Earnings Forecast ($000s)
Sales of Mini Mochi Munch 9,000 7,000
Other Sales 2,000 2,000
Cost of Goods Sold (7,350) (6,050)
3
4
5
6
Gross Profit 3,650 2,950
Selling, General & Admin. (5,000) - Depreciation - -
7
8
9
EBIT (1,350) 2,950
Income tax at 35% 473 (1,033)
10
11
Unlevered Net Income (878) 1,918
7-9. Elmdale Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars):
a. What are the incremental earnings for this project for years 1 and 2?
b. What are the free cash flows for this project for the first two years?
a.
Year 1
2
Increm ental Earnings Forecast ($000s)
1
Sales
125.0
160.0
2
Costs of good sold and operating expenses other than depreciation
(40.0)
(60.0)
3