Good news! You have been assigned to work on the budget for a new genre-bending
ID: 2733919 • Letter: G
Question
Good news! You have been assigned to work on the budget for a new genre-bending sequel to "8 Mile", entitled "Modigliani, Miller, and Mathers: Will the Real M&M; Please Stand Up?", staring an aging Mr. Mathers as a veteran Detroit musician seeking a career change and the truth about his paternity in the high-flying world of corporate finance. New Line Cinema plans a run of two years for the new movie (from chains to dollar theaters). New Line has estimated e following incremental earnings forecast for the movie. All capital expenditures occur in year 0 and are depreciated straight-line. New Line's effective annual cost of capital is 12%. Suppose that New Line expects that over the two years of the project's life, receivables will be 10% of annual sales and payables will be 20% of annual cost of goods sold. New Line will hold no additional cash or inventories as a result of the project. Fill in the blanks in the table below.Explanation / Answer
Year
0
1
2
3
Depreciation
0
20
20
0
Capital Expenditure
(40)
0
0
0
Increase in NWC
0
(8)
(6)
0
Free Cash Flow
0
58
56
0
Depreciation = 20 (Given)
Capital Expenditure = Yearly depreciation x 2 = 40 (As project’s life is 2 years and depreciation is 20 per year as given)
Increase in NWC = Payables – Receivables
=> Year 1 = (20% x 10) – (10% x 100) = -8
=> Year 2 = (20% x 10) – (10% x 80) = -6
Free Cash flow = Unlevered Net Income + Depreciated Amount – Increase in NWC
=> Year 1 = 30 + 20 –(-8) = 58
=> Year 2 = 30 + 20 –(-6) = 56
Year
0
1
2
3
Depreciation
0
20
20
0
Capital Expenditure
(40)
0
0
0
Increase in NWC
0
(8)
(6)
0
Free Cash Flow
0
58
56
0
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