Lab Report for Attention Distribution

1.

a.

Assume the firm has no debt,

 Return on Equity = Return on Capital = 10%

g = Reinvestment Rate * Return on Equity

 5% = Reinvestment Rate * 10%

 Reinvestment Rate = 50%

b.

Building upon the previous question,

 FCFF = After-tax Operating Income * (1-Reinvestment Rate)

= $100M * (1-50%)

= $50

 Value of the firm = FCFF*(1+g)/(WACC-g)

= 50M * (1+5%)/(10%-5%)

= $1,050M

c.

Value of the firm = FCFF/WACC

= 100M/10%

= $1,000M

2.

a.

b.

Yes, based on the NPV investment decision rule, this project does create value for BASF. Given the cash flows from year 0 to year 5 and the required return of 15%, Net Present Value for this project is $484,000.89.

3.

a.

Assumptions 　

tax rate 40.00%

Stable Growth Rate 4.00%

No. of Share Outstanding 62,000,000

Required NWC% 7.00%

tax rate 40.00%

Inflation Rate (1994-1998) 9.50%

Inflation Rate (>1998) 4.00%

　 1993 1994 1995 1996 1997 1998 1999

Revenue $13,500,000,000 $14,782,500,000 $16,186,837,500 $17,724,587,063 $19,408,422,833 $21,252,223,003 $22,102,311,923

EBITDA $1,290,000,000 $1,412,550,000 $1,546,742,250 $1,693,682,764 $1,854,582,626 $2,030,767,976 $2,111,998,695

Depreciation $400,000,000 $438,000,000 $479,610,000 $525,172,950 $575,064,380 $629,695,496 $654,883,316

EBIT $890,000,000 $974,550,000 $1,067,132,250 $1,168,509,814 $1,279,518,246 $1,401,072,479 $1,457,115,379