Zach Savidge Problem Set #1: Corporate Finance

Problem 1

a. 180,000b. $1.4/per share c. EBITDA = Net income + Interest + taxes + depreciation & amortization EBITDA = 140,000 + 0 + 60,000 + 40,000 = 240,000EBITDA = $240,000

EBITDA is an accrual accounting proxy for cash flow to the firm. It is useful because it is independent of capital structure and non-cash charges, hence allowing for a better comparison of operating profitability across firms.

d. The company did not pay out dividends. Dividends would be represented as a cash outflow in cash from financing activities. Since the cash flow statement shows there was no net cash flow from financing, dividends could only have been paid if there was an equal and offsetting inflow from activities classified as cash flow from financing activities. Since no debt is present on the balance sheet and the question stipulates that no equity was issued, there were no cash inflows from financing activities. Hence, the company did not pay out dividends.

e.

Problem 2

a.

Balance Sheet

AssetsLiabilities

Cash $210,000.00 Paid In Capital $200,000.00

Inventory $60,000.00 Retained Earnings $430,000.00

Net PP&E $360,000.00 Shareholder's Equity $630,000.00

Total Assets $630,000.00 Total Liabilities & Shareholder's Equity $630,000.00

Income Statement

Sales $600,000.00

COGS $(360,000.00)

Gross Profit $240,000.00

D&A $(40,000.00)

Operating Profit $200,000.00

Loss on Disposal of Assets $(100,000.00)

Pretax Income $100,000.00

Income Tax Expense $(30,000.00)

Net Income $70,000.00

Cash Flow Statement

Operating Activities

Net Income $70,000.00

D&A $40,000.00

Loss on Disposal of Asset $100,000.00

Cash from Operating Activities $210,000.00

Cash from Investing Activities $0

Cash from Financing Activites $0

Change in Cash $210,000.00

b. The companys net income declines by $70,000. This is because the mark-down of the asset from $100,000 to $0 shows up on the income statement as a loss on disposal of assets, decreasing pretax income by $100,000. A lower pre-tax income also incurs a lower tax expense, however. The tax expense declines by $30,000 ($100,000 x 30% corporate tax rate). Hence the overall change to net income is -100,000 + 30,000 = -70,000

c. The companys cash flow increases by $30,000. This is because the write-off of the asset is a non-cash expense but leads to decline in cash taxes paid. Hence the companys cash flow from operating activities increases by $30,000 less in taxes paid.

d. The both the companys assets and liabilities decline by $70,000. On the assets side, Net PP&E declines by $100,000 due to the write off but cash increases by $30,000 due to the reduced cash taxes paid. On the liabilities side, retained earnings declines by $70,000 due to the decline in net income.

Problem 3

a. According to the VC predictions, the firm will be worth 20 *$10million = $200 million in 5 years.

The VC is targeting a 50% IRR on their $5 million investment, hence they need their investment in the firm to be worth million in 5 years.

Therefore the VC will request of orange bubble.

b. By paying $5 million for 18.98% of the company, the VC valued the firm at

Hence the value of the entrepreneurs stake is