Mci Communications

Topics: Generally Accepted Accounting Principles, Finance, Corporate finance Pages: 2 (590 words) Published: December 25, 2011
Question1.
NPV = FCF1/(1+WACC)+FCF2/(1+WACC)^2+FCF3/(1+WACC)^3+FCF4/(1+WACC)^4+FCF5/(1+WACC)^5 +FCFp, where FCF1…FCF5 are the free cash flows in years from 1999 to 2003. FCF = Cash flow from Operations – increase in net working capital requirement – capital expenditures, discounted by WACC. For example, in 1999 FCF1 = (7965 – 516 – 4938)/(1+0,1) = 2283. Similarly, we calculate FCF2=2479, FCF3=2666, FCF4=3007, FCF5=3132. As we assume, that after 2003 the FCF will grow permanently by 4% by year to the infinity, we can calculate FCFp as perpetuity: FCFp = FCF2004/(WACC-g) = 54288 So finally, we got NPV = 67855 and can calculate EV = NPV + WCR (1999) EV = 81275, which is the maximum price for the Hampton Tool, that Lycos should be willing to pay.

Question2. Part1
Data Inc. has $40 billion of equity and $60 billion of debt currently. So the initial leverage (D/V) is 60%. We can calculate the cost of equity using this formula: WACC = ke * E/V + kd *(1-t) *D/V. ke = the cost of equity = 20%

Using the same formula we calculate WACC, when the leverage is 20%: WACC = 17,2% Part2
To change leverage from 60% to 20%, Data Inc. is needed to buy back $50 billion of debt, so the leverage will be 10/(10+40) = 20%, the company’s value will decrease to $50 billion. From the other hand, Data Inc. can issue $240 billion of equity, so the leverage will be 60/(60+240) = 20%. Question3. Part1

Sources and uses exhibit
Retained Earnings = Net income less preferred dividends
Other funds = Deferred taxes +employee stock purchase plan
Increase in adjusted working capital = working capital – cash – short-term debt
FY1984FY1985FY1986FY1987FY1988
A.Funds from operations
Retained Earnings210235371588731
Depreciation173272412601749
Other6588106120140
Total44859588913091620
B.External financing
Net increase in lease obligations00000
Other net borrowing, sale of securities00000
Total00000
Total uses4485958891309...
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