Exam 12: Valuation: Cash-Flow-Based Approaches

A comparative balance sheet for Otto Inc.is presented below: 2012 2011 Assets Cash \ 63,000 \ 22,000 Accounts receivable 82,000 66,000 Inventories 180,000 189,000 Land 71,000 110,000 Equipment 270,000 200,000 Accumulated depreciation - (69,000) (42,000) Equipment Total \ 597,000 \ 545,000 Liabilities \& Stockholders' Equity Accounts payable \ 34,000 \ 47,000 Bonds payable 150,000 200,000 Common stock ( \1 par) 214,000 164,000 Retained earnings 199,000 134,000 Total \ 597,000 \ 545,000 Additional information: 1.Net income for 2012 was $105,000. 2.Cash dividends of $40,000 were declared and paid. 3.Bonds payable amounting to $50,000 were retired through issuance of common stock. Required: (a)Prepare a statement of cash flows for 2012 for Otto,Inc. (b)Compute Otto's current cash debt coverage ratio and cash debt coverage ratio. (c)Determine Otto Inc.'s free cash flow and comment on its liquidity and financial flexibility.

If the objective is to value operating assets net of operating liabilities of a firm then the appropriate free cash flow measure to be used is ______________________________________________________________________.

Simpson Department Store Simpson Department Stores operates retail department store chains throughout the United States.At the end of Year 10, Simpson reports debt of $5,897 million and common shareholders' equity at book value of $4,400 million.The market value of its common stock is $6,895, and its market equity beta is 0.79.An equity buyout group is considering an LBO of Simpson as of the beginning of Year 11.The group intends to finance the buyout with 25 percent common equity and 75 percent debt carrying an interest rate of 10.65 percent. -Regarding the equity buyout,compute the cost of equity capital with the new capital structure that results from the LBO.Assume a risk-free rate of 3.75percent and a market risk premium of 5.0 percent.

Continuing free cash flows represent: