Free Cash flow to Equity Model

Question 01

• A company launched a new Shampoo with expected sales 50,000 units per year at a price
of $4 per shampoo. The variable cost per shampoo is $2.50 and fixed cost is $12,000 per
year.
• This new product has a total value of life of four years. The company will make an initial
investment of $90,000 to purchase a manufacturing equipment.
• Assume this equipment will 100% depreciated within three years through straight line
depreciation method/MACRS/sum of Digits. Finally, the project will require an initial
$20,000 investment in net working capital, and the tax rate is 34 percent. Required rate of
return is 12%.

• Calculate the market price/share if the the company has 5000 share outstanding
MACRS

Question 02

• A company expected new Shampoo sales of 50,000 units per year at a price of $4 per
shampoo. The variable cost per shampoo is $2.50 and fixed cost is $12,000 per year.
• This new product has a total value of life of three years. The company will make an
initial investment of $90,000 to purchase a manufacturing equipment.
• Assume this equipment will 100% depreciated within three years through straight line
depreciation method/Sum of Digits Method/Double declining method. Finally, the project
will require an initial $20,000 investment in net working capital, and the tax rate is 34
percent.
The Free Cash flow expected growth rate is 2% in fourth year and thereafter forever
a) Calculate market price per share based FCFE Model

Question 03
Howell Petroleum is considering a new project that complements its existing business. The
machine required for the project costs $3 million. The marketing department predicts that sales
related to the project will be $2.5 million per year for the next four years, after which the market
will cease to exist. The machine will be depreciated down to zero over its four-year economic
life using the straight-line/sum of digits methods. Cost of goods sold and operating expenses
related to the project are predicted to be 25 percent of sales. Howell also needs to add net
working capital of $150,000 immediately. The additional net working capital will be recovered
in full at the end of the project’s life. The corporate tax rate is 35 percent.
In addition, the company will raise 1.00 million capital via coupon bonds having 8 percent
coupon bonds outstanding, $1,000 par value,04 years to maturity, selling for 103 percent of par;
the bonds making annual payments. While the remaining $2.00 M will be raised through 10,000
common shares. The company has Beta value of 0.5, Index returns is 4% and T-bills rate is 3%.
a) Calculate Market price/Share based on FCFE