Lawrence Miller is valuing Yucy Corporation, a corporation that is going out of business in four years....

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Finance

Lawrence Miller isvaluing Yucy Corporation, a corporation that is going out ofbusiness in four years. Projected financial statements for theremaining life of Yucy are given below.
Year 0 1 2 3 4
BalanceSheet:
Assets 250,000 180,000 130,000 100,000 0
Liabilities 194,604 157,010 116,281 72,072 0
Net worth 55,396 22,990 13,719 27,928 0
IncomeStatements:
Sales 220,000 240,000 260,000 280,000
Variable cashexpenses 60,000 70,000 80,000 90,000
Fixed cash expenses 10,000 10,000 10,000 10,000
Depreciation 70,000 50,000 30,000 100,000
EBIT 80,000 110,000 140,000 80,000
Interest expense 9,730 7,851 5,814 3,604
EBT 70,270 102,149 134,186 76,396
Taxes at 40% 28,108 40,860 53,674 30,559
Net income beforesalvage 42,162 61,290 80,512 45,838
After-tax salvagevalue 12,000
Net income 42,162 61,290 80,512 57,838
To assist withvaluation, Lawrence also gathered the following information:
Before-tax cost of debt = 5%
Weighted average cost of capital = 11%
Cost of equity=19%
Theeconomic income during Year 1 is closestto:
$30,261
$41,943
$42,813
$90,883
$96,155

Answer & Explanation Solved by verified expert

3.8 Ratings (397 Votes)

Cost of Debt	5%
Cost of Equity	19%
WACC	11%

Year	0	1	2	3	4
Balance Sheet:
Assets	250,000	180,000	130,000	100,000	0
Liabilities	194,604	157,010	116,281	72,072	0
Net worth	55,396	22,990	13,719	27,928	0
Income Statements:
Sales		220,000	240,000	260,000	280,000
Variable cash expenses		60,000	70,000	80,000	90,000
Fixed cash expenses		10,000	10,000	10,000	10,000
Depreciation		70,000	50,000	30,000	100,000
EBIT		80,000	110,000	140,000	80,000
Interest expense		9,730	7,851	5,814	3,604
EBT		70,270	102,149	134,186	76,396
Taxes at 40%		28,108	40,860	53,674	30,559
Net income before salvage		42,162	61,290	80,512	45,838
After-tax salvage value					12,000
Net income		42,162	61,290	80,512	57,838

Average Equity		39,193	18,355	20,824
Cost of Equity		7,447
Economic Income		34,715	=Net Income - Cost of Equity

Average Capital		215,000	155,000	115,000
Cost of Capital		23,650
EBIT*(1-tax)		48,000
Economic Income		24,350	=Total Operating Income - Cost of Capital

Average Economic Income based on 2 methods		29,533

So, closest is 1st option - $30,261

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Transcribed Image Text

Lawrence Miller isvaluing Yucy Corporation, a corporation that is going out ofbusiness in four years. Projected financial statements for theremaining life of Yucy are given below.Year01234BalanceSheet:Assets250,000180,000130,000100,0000Liabilities194,604157,010116,28172,0720Net worth55,39622,99013,71927,9280IncomeStatements:Sales220,000240,000260,000280,000Variable cashexpenses60,00070,00080,00090,000Fixed cash expenses10,00010,00010,00010,000Depreciation70,00050,00030,000100,000EBIT80,000110,000140,00080,000Interest expense9,7307,8515,8143,604EBT70,270102,149134,18676,396Taxes at 40%28,10840,86053,67430,559Net income beforesalvage42,16261,29080,51245,838After-tax salvagevalue12,000Net income42,16261,29080,51257,838To assist withvaluation, Lawrence also gathered the following information:Before-tax cost of debt = 5%Weighted average cost of capital = 11%Cost of equity=19%Theeconomic income during Year 1 is closestto:$30,261$41,943$42,813$90,883$96,155

Year	0	1	2	3	4
BalanceSheet:
Assets	250,000	180,000	130,000	100,000	0
Liabilities	194,604	157,010	116,281	72,072	0
Net worth	55,396	22,990	13,719	27,928	0
IncomeStatements:
Sales		220,000	240,000	260,000	280,000
Variable cashexpenses		60,000	70,000	80,000	90,000
Fixed cash expenses		10,000	10,000	10,000	10,000
Depreciation		70,000	50,000	30,000	100,000
EBIT		80,000	110,000	140,000	80,000
Interest expense		9,730	7,851	5,814	3,604
EBT		70,270	102,149	134,186	76,396
Taxes at 40%		28,108	40,860	53,674	30,559
Net income beforesalvage		42,162	61,290	80,512	45,838
After-tax salvagevalue					12,000
Net income		42,162	61,290	80,512	57,838