Epiphany Industries is considering a new capital budgeting project that will las
ID: 2778853 • Letter: E
Question
Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it has prepared the following incremental cash flow projects:
Year
0
1
2
3
Sales (Revenues)
100,000
100,000
100,000
- Cost of Goods Sold (50% of Sales)
50,000
50,000
50,000
- Depreciation
30,000
30,000
30,000
= EBIT
20,000
20,000
20,000
- Taxes (35%)
7000
7000
7000
= unlevered net income
13,000
13,000
13,000
+ Depreciation
30,000
30,000
30,000
- capital expenditures
-90,000
The free cash flow for the first year of Epiphany's project is closest to:
a. $43,000
b. $25,000
c. $13,000
d. $45,000
Problems:
Use the following information to answer the question(s) below.
Company
Ticker
Price
per Share
Earnings
per Share
Book Value
per Share
Abbott Labs
ABT
54.35
3.69
13.79
Bristol-Myers-Squibb
BMY
25.45
1.93
7.33
GlaxoSmithKline
GSK
41.3
3.15
6.03
Johnson & Johnson
JNJ
62.6
4.58
18.27
Merck
MRK
36.25
3.81
10.86
Pfizer
PFE
$18.30
$1.20
8.19
1. Assuming that Novartis AG (NVS) has an EPS of $3.35, what is the highest expected stock price for Novartis, based upon the P/E ratios for its competitors?
Problems:
1. What is an efficient portfolio?
2. Explain why the risk premium of a stock does not depend on its diversifiable risk.
Year
0
1
2
3
Sales (Revenues)
100,000
100,000
100,000
- Cost of Goods Sold (50% of Sales)
50,000
50,000
50,000
- Depreciation
30,000
30,000
30,000
= EBIT
20,000
20,000
20,000
- Taxes (35%)
7000
7000
7000
= unlevered net income
13,000
13,000
13,000
+ Depreciation
30,000
30,000
30,000
- capital expenditures
-90,000
Explanation / Answer
Year 0 Year 1 Year 2 Year 3 Sales 100000 100000 100000 Less: COGS 50000 50000 50000 Less: Dep 30000 30000 30000 EBIT 20000 20000 20000 Less: Taxes 7000 7000 7000 Net Income 13000 13000 13000 Net Income $13,000 $13,000 $13,000 Add: Depreciation $30,000 $30,000 $30,000 Investment ($90,000) Net Cash Flow ($90,000) $43,000 $43,000 $43,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.