Practice Problems

These problems are for practice only. You need not turn in the solutions.

1. The following information is

available for ABC.

Table 1 Year 1 Year 2

Revenues 150 200

COGS and SG&A 50 75

Depreciation 30 40

Change in Working capital 75 55

CAPEX 20 20

Dividends 10 10

Tax rate 35% 35%

ABC has no debt.

a. Compute ABC’s earnings after taxes (Net Income) for Years 1 and 2
b. Compute ABC’s NOPLAT and free cash flow for Years 1 and 2
Use the data in Table 2 to answer questions 2 through 5. Table 2 presents selected
financial data for XYZ. Assume that XYZ has no preferred stock or excess cash.
Table 2
Year 1 Year 2
Sales 90,000 80,000
Inventory 600 300
Accounts Receivables 1,400 900
EBITDA 3,500 3,000
Depreciation and Amortization 300 320
Interest expense 200 180
Tax Expense 1050 875
Change in Working Capital 500 350
CAPEX 250 250
Dividends 100 100
Debt 1,500 1,000
Equity – Book Value 700 1,000
Equity – Market Value 2,000 2,500
Number of Shares outstanding 100 100
Total Assets 15,000 16,000

2. Compute XYZ’s Net Income for

Year 1 and Year 2.
3. Compute XYZ’s NOPLAT and
enterprise free cash flow for Year 1 and Year 2.
4. Compute XYZ’s ROA and ROIC.
5. Suppose the risk-free rate = 6%,
equity premium=5%, XYZ’s cost of debt=8% and beta= 1.2. Compute XYZ’s WACC
in Year 1 and Year 2.
6. Discuss two situations in which
current P/E ratios may not be useful for relative valuation. How would you handle
these situations?
Answer: See L11-Slide 6
7. Give a reason why P/B ratio may
not be useful for comps analysis.
Answer: See L11-Slide 7