I’m getting confused on some concepts here. The problem uses the following information. (I tried to make a table but I’m messing up the formatting.)
Year
0
1
2
3
4
Balance Sheet:
Assets
250,000
180,000
130,000
100,000
0
Liabilities
194,604
157,010
116,281
72,072
0
Net worth
55,396
22,990
13,719
27,928
0
Income Statements:
Sales
220,000
240,000
260,000
280,000
Variable cash expenses
60,000
70,000
80,000
90,000
Fixed cash expenses
10,000
10,000
10,000
10,000
Depreciation
70,000
50,000
30,000
100,000
EBIT
80,000
110,000
140,000
80,000
Interest expense
9,730
7,851
5,814
3,604
EBT
70,270
102,149
134,186
76,396
Taxes at 40%
28,108
40,860
53,674
30,559
Net income before salvage
42,162
61,290
80,512
45,838
After-tax salvage value
12,000
Net income
42,162
61,290
80,512
57,838
Cost of equity is 19%. Before tax cost of debt is 5%. WACC = 11%.
The two questions are
-
What is the value of equity at time 0 based on the residual income method? My solution was to calculate the NPV of residual income + book value at time 0 (55396). Is that correct? My result was 194604.
-
What is the value of the firm at time 0 calculated from the company’s cash flow? I calculated this using NPV of residual income + equity investment + debt investment = 139207+55396+194604 = 389207. Is that correct?