There's No Such Thing as a Free Cash Flow
Formula for calculating the FCF at the end of a project.
FCF=(S-E-D)*(1-t) + D - DeltaNWC - DeltaPPE +- SideEffects + NSV + RecoveredNWC
Name of Pepperdine's current president.
Jim Gash
Depreciable basis of a piece of equipment that cost $50,000, has installation costs of $1,000, has moving costs of $500.
Depreciable Basis = $50,000+$1,000+$500=$51,500
Overpriced or underpriced:
CAPM return: 10%
Average return over 5 years: 5%
Overpriced
Suppose a company decides to open a new branch in the next county. The after-tax cash flows for the new center are expected to be $15,000 per month. However, the new center will cause some customers to switch to the new branch creating a negative side effect. The lost membership fees from the original location are estimated at $2,000 per month. The after-tax operating margin on memberships is 60%.
What is the cash flow from the monthly side effect?
Side Effect = -$2,000*60% = -$1,200 per month
You have spent $2 million in project planning over the past and from these efforts, you have learned the following information. The project will require the purchase of equipment (5-year useful life) for $25 million. Employee training will cost another $5 million. The project will be operated for 4 years generating estimated annual sales revenues of $16 million and estimated annual expenses of $5 million. The tax rate for the project is 40%.
Suppose the firm will sell the equipment at year 4 and it can get $8 million for it.
What are the taxes on the sale of that equipment?
Taxes on sale = t*(MV-BV) = 0.4*(8-5) = $1.2 million
Company with a valuation that went from $60ish billion to $12ish billion.
WeWork
Yearly depreciation for a piece of equipment with a depreciable basis is of $2,000,000 and a useful life of 8 years that is depreciated using straight-line depreciation.
Yearly Depreciation = $2,000,000/8 = $250,000
Day Business Wars calculations are due.
April 15, 2024
The working capital requirements for a 2-year project are as follow:
Year 0: Accounts Receivable = $0, Inventory = $100, Accounts Payable = $0
Year 1: Accounts Receivable = $100, Inventory = $100, Accounts Payable = $50
Year 2: Accounts Receivable = $150, Inventory = $100, Accounts Payable = $100
What is the investment in NWC for year 1?
Investment in NWC 1 = NWC1 - NWC0 = $150 - $100
NWC = CA-CL = (AR+Inv+Cash) - (AP+Accruals)
NWC0 = 0 + 100 - 0 = $100
NWC1 = 100 + 100 -50 = $150
You have spent $2 million in project planning over the past and from these efforts, you have learned the following information. The project will require the purchase of equipment (5-year useful life) for $25 million. Employee training will cost another $5 million. The project will be operated for 4 years generating estimated annual sales revenues of $16 million and estimated annual expenses of $5 million. The tax rate for the project is 40%.
What is the FCF in time 0?
FCF0 = (0-5-0)*(1-.4)+0-0-25 = -$28 million
Tool/method we use to get the present value of future cash flows.
Discounted Cash Flow (DCF) analysis
What is the depreciation in year 3 of a piece of equipment that had a depreciable basis in year 0 of $150,000, a useful life of 5 years, and is depreciated according to the 5-year MACRS schedule:
1 20%
2 32%
3 19.2%
4 11.52%
5 11.52%
6 5.76%
D(year 3) = $150,000*19.2% = $28,800
Two things to remember when using financial ratios.
-Look at the trend over time
-Compare similar firms
-Use audited numbers
-Know what you're trying to measure
A firm just spent $4.00 million conducting a marketing survey. The survey looked at consumer interest in a new home gaming system. The firm has examined the results and will now invest $131.00 million in developing the new system.
What kind of cash flow is the $4.00 million spent on the marketing survey?
Sunk cost
You have spent $2 million in project planning over the past and from these efforts, you have learned the following information. The project will require the purchase of equipment (5-year useful life) for $25 million. Employee training will cost another $5 million. The project will be operated for 4 years generating estimated annual sales revenues of $16 million and estimated annual expenses of $5 million. The tax rate for the project is 40%.
What is the FCF in time 1?
FCF1 = (16-5-5)*(1-0.4)+5-0-0 = $8.6 million
Color of Dr. O'Steen's bitmoji's shirt.
Pink
What is the book value of a 3-year-old piece of equipment with a depreciable basis of $100,000 and 5-year useful life depreciated by the 5-year MACRS schedule:
1 20%
2 32%
3 19.2%
4 11.52%
5 11.52%
6 5.76%
BV=$100,000-$20,000-$32,000-$19,200=$28,800
A retiree wants to try to beat the stock market. She is considering three possible stocks but will only invest in one. Which stock is best for her?
Stock A: E(r) = 8%, stdev = 18%
Stock B: E(r) = 6%, stdev = 15%
Stock C: E(r) = 15%, stdev = 45%
CV(A) = 2.25
CV(B) = 2.5
CV(C) = 3
Choose Stock A!
A new restaurant franchise requires $50,000 in new cooking equipment for the kitchen. The equipment will be straight-line depreciated over 10 years. At the end of the 8th year, the owner expects to salvage (sell) the equipment for $5,000 on the secondary market. The marginal tax rate for the owner is 35%.
What is the Net Salvage Value (NSV) when the cooking equipment is sold after 8 years?
NSV = $6,750 = $5,000 - 0.35*($5,000 - $10,000) = MV - t*(MV - BV)
BV = $50,000 - 8*$5,000 = $10,000
Daily Double!
$772.65 million
Number between 0 and 100. (Closest team gets the points. Every other team loses the points.)
49
Daily Double!
$28,838.21
A stock has a beta of 0.8. The risk-free rate in the economy is 1.5%, while the market portfolio risk premium is 6%. Find the cost of equity for this stock.
r = 1.5% + 0.8*(6%) = 6.3%
A firm will use an existing warehouse for a project. The firm can sell the warehouse today for $3.5 million (after-tax CF) if it rejects this opportunity. The project will last ten years, and the firm thinks the after-tax value of the warehouse will appreciate by 4% per year during that time. Ignoring taxes, what is the net opportunity cost of this warehouse if the cost of capital facing the firm is 15%?
Net opportunity cost today = -$3.5 + $5.18/(1.15^10) = -$2.22 million
Opportunity cost of warehouse today = -$3.5 million
Value of warehouse at end of project =$3.5*(1.04)^10 = $5.18 million