Reading 50: Security Analysis Using Value-Based Metrics - style, border, following, reported

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6.Timesaver Convenience Stores (TCS) reported the following year-end results for 2004 and the forecasted changes for the same variables for 2005.

	2004 Actual (millions)	Forecasted Change (%)
Revenue	71.2	+7.0
COGS	43.1	+6.0
SG&A	9.9	+3.0
Depreciation	8.3	+3.5
Interest expense	3.5	+10.3

What is the forecasted 2005 net operating profit after-tax (NOPAT) for TCS assuming that the tax rate changes from 33% in 2004 to 37% in 2005?

A)   7.4 million.

B)   6.6 million.

C)   18.2 million.

D)   4.9 million.

7.In 2001, Kevco, Incorporated had a net operating profit after taxes of $500,000. At the end of 2001 the debt and the debt equivalents of the company totaled $625,000 and total equity was $2 million. If the company’s weighted-average cost of capital is 16 percent, what was the Economic Value Added by the company for 2001?

A)   $80,000.

B)   $180,000.

C)   $106,250.

D)   -$180,000.

8.Edge Manufacturing (EM) has a target debt-to-equity ratio of 1 to 4 with $1 million in invested capital. The yield-to-maturity on EM’s debt is 8 percent and its equity beta is 1. EM’s marginal tax rate is 33 percent. The consensus expected return on the stock market index is 11 percent. What is dollar weighted average cost of capital for EM?

A)   $98,700.

B)   $104,000.

C)   $74,700.

D)   $64,900.

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答案和详解如下：

6.Timesaver Convenience Stores (TCS) reported the following year-end results for 2004 and the forecasted changes for the same variables for 2005.

	2004 Actual (millions)	Forecasted Change (%)
Revenue	71.2	+7.0
COGS	43.1	+6.0
SG&A	9.9	+3.0
Depreciation	8.3	+3.5
Interest expense	3.5	+10.3

What is the forecasted 2005 net operating profit after-tax (NOPAT) for TCS assuming that the tax rate changes from 33% in 2004 to 37% in 2005?

A)   7.4 million.

B)   6.6 million.

C)   18.2 million.

D)   4.9 million.

The correct answer was A)    

	2004 Actual (millions)	Forecasted Change (%)	2005 Forecasted
Revenue	71.2	+7.0	76.2
COGS	43.1	+6.0	45.7
SG&A	9.9	+3.0	10.2
Depreciation	8.3	+3.5	8.6
Interest expense	3.5	+10.3	3.9
Tax rate (%)	33	37

NOPAT = (Sales – COGS – SG&A – Depreciation) x (1-Tax rate)

= (76.2 – 45.7 – 10.2 – 8.6) x (1-.37)

= 7.4

7.In 2001, Kevco, Incorporated had a net operating profit after taxes of $500,000. At the end of 2001 the debt and the debt equivalents of the company totaled $625,000 and total equity was $2 million. If the company’s weighted-average cost of capital is 16 percent, what was the Economic Value Added by the company for 2001?

A)   $80,000.

B)   $180,000.

C)   $106,250.

D)   -$180,000.

The correct answer was A)

EVA^® = $500,000 - 0.16 x ($2,000,000 + $625,000) = $80,000.

8.Edge Manufacturing (EM) has a target debt-to-equity ratio of 1 to 4 with $1 million in invested capital. The yield-to-maturity on EM’s debt is 8 percent and its equity beta is 1. EM’s marginal tax rate is 33 percent. The consensus expected return on the stock market index is 11 percent. What is dollar weighted average cost of capital for EM?

A)   $98,700.

B)   $104,000.

C)   $74,700.

D)   $64,900.

The correct answer was A)

For every $5 of capital, EM has $1 in debt and $4 in equity – a 1 to 4 ratio.  Therefore, the proportion of debt in the capital structure is 1/5 or 20% ($200,000).  Likewise the proportion of equity is 4/5 or 80% ($800,000).

 

After-tax cost of debt = 0.08 x (1-0.33) = 0.0536 or 5.36 percent.

Cost of equity = 0.11 or 11 percent (beta = 1 implies the same expected return as the market portfolio)

 

WACC = (0.20 x 0.0536) + (0.80 x 0.1100) = 0.0987 or 9.87%

 

$WACC = 0.0987 x $1,000,000 = $98,700