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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.
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