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Zach Saviuge

Pioblem Set #1: Coipoiate Finance

!"#$%&' )

a. 18u,uuu
b. $1.4pei shaie
c. EBITBA = Net income + Inteiest + taxes + uepieciation & amoitization
EBITBA = 14u,uuu + u + 6u,uuu + 4u,uuu = 24u,uuu
EBITBA = $24u,uuu

EBITBA is an acciual accounting pioxy foi cash flow to the fiim. It is useful because
it is inuepenuent of capital stiuctuie anu non-cash chaiges, hence allowing foi a
bettei compaiison of opeiating piofitability acioss fiims.

u. The company uiu not pay out uiviuenus. Biviuenus woulu be iepiesenteu as a
cash outflow in cash fiom financing activities. Since the cash flow statement shows
theie was no net cash flow fiom financing, uiviuenus coulu only have been paiu if
theie was an equal anu offsetting inflow fiom activities classifieu as cash flow fiom
financing activities. Since no uebt is piesent on the balance sheet anu the question
stipulates that no equity was issueu, theie weie no cash inflows fiom financing
activities. Bence, the company uiu not pay out uiviuenus.

!"#$% !"# !!!"#
!"#$%$&' !"# !!!"#
! !"!!"

!"#$%&' *


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$210,000.00 ald ln CaplLal

lnvenLory $60,000.00 8eLalned Larnlngs

neL &L

$360,000.00 Shareholder's LqulLy


$630,000.00 1oLal LlablllLles & Shareholder's LqulLy


0$%12& (*"*&2&$*
Sales $600,000.00
CCCS $(360,000.00)
Cross roflL $240,000.00
u&A $(40,000.00)
CperaLlng roflL $200,000.00
Loss on ulsposal of AsseLs $(100,000.00)
reLax lncome $100,000.00
lncome 1ax Lxpense $(30,000.00)
neL lncome $70,000.00

3",) 4#15 (*"*&2&$*
CperaLlng AcLlvlLles

neL lncome $70,000.00

u&A $40,000.00

Loss on ulsposal of AsseL $100,000.00
Cash from CperaLlng AcLlvlLles $210,000.00
Cash from lnvesLlng AcLlvlLles $0
Cash from llnanclng AcLlvlLes $0
Change ln Cash $210,000.00

b. The company's net income ueclines by $7u,uuu. This is because the maik-uown of
the asset fiom $1uu,uuu to $u shows up on the income statement as a loss on
uisposal of assets, uecieasing pietax income by $1uu,uuu. A lowei pie-tax income
also incuis a lowei tax expense, howevei. The tax expense ueclines by $Su,uuu
($1uu,uuu x Su% coipoiate tax iate). Bence the oveiall change to net income is
-1uu,uuu + Su,uuu = -7u,uuu

c. The company's cash flow incieases by $Su,uuu. This is because the wiite-off of the
asset is a non-cash expense but leaus to uecline in cash taxes paiu. Bence the
company's cash flow fiom opeiating activities incieases by $Su,uuu less in taxes

u. The both the company's assets anu liabilities uecline by $7u,uuu. 0n the assets
siue, Net PP&E ueclines by $1uu,uuu uue to the wiite off but cash incieases by
$Su,uuu uue to the ieuuceu cash taxes paiu. 0n the liabilities siue, ietaineu eainings
ueclines by $7u,uuu uue to the uecline in net income.

!"#$%&' -

Accoiuing to the vC pieuictions, the fiim will be woith 2u *$1umillion = $2uu
million in S yeais.

The vC is taigeting a Su% IRR on theii $S million investment, hence they neeu theii
investment in the fiim to be woith !" !"##"$% ! !!!
! !"#!!" million in S yeais.

Theiefoie the vC will iequest
! !"!!"# of oiange bubble.

b. By paying $S million foi 18.98% of the company, the vC valueu the fiim at
!" !"##"$%
! !"#"
! !"#!!" !"##"$%

Bence the value of the entiepieneui's stake is !"#!!" !"##"$% ! ! !!!"#" !
!"#!!" !"##"$%