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qwelly [4]
3 years ago
10

From the next year onwards, Colt Systems is estimated to have an EBIT of $15 million. It will also spend $6 million annually on

total capital expenditures and increases in net working capital, and have $3 million in depreciation expenses. Colt is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%. a) What is the market value of its equity today (assuming all cash flows are paid back to the equity holders at the end of each year)?
Business
1 answer:
Blababa [14]3 years ago
3 0

Answer: $67.5 million

Explanation:

Since we are given the information that all cash flows are paid back to the equity holders at the end of each year, the market value of its equity today will be:

= [EBIT × (1 - t) + Depreciation - Capital Expenditure - Change in Working capital] / (Cost of Capital - Growth rate)

= ($15 million(1 - 35%) + $3 million - $6 million) / 10%

= [$15 million (1 - 0.35) + $3 million - $6 million] / (10%

= ($15 million × 0.65) + $3 million - $6 million) / 0.1

= ($9.75 million + $3 million - $6 million)/0.1

= $6.75 million / 0.1

= $67.5 million

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Explanation:

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Quarter                               FIRST      SECOND     THIRD     FOURTH

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Raw material per unit               3               3                 3                 3

=================================================================

Thus,

Need for material  = Production in unit × Raw material per unit

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Quarter                                         FIRST      SECOND     THIRD     FOURTH

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Desired ending inventory = 25% of next quarter's production needs for material

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ADD:

Desired ending inventory             66000       73500      58500  

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Total need of material = Need for material in production + Desired ending inventory

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Quarter                               FIRST      SECOND     THIRD      FOURTH

Total need of material =       210,000    337,500     352,500  

Beginning inventory             38000  66000       73500  

==================================================================

Total purchase = Total need of material - Beginning inventory

==================================================================

Quarter                               FIRST      SECOND     THIRD      FOURTH

Total purchase =                   172,000     271,500      279,000

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