Calculate the companys horizon value, Financial Management

A. Mitt starts Examine Your Zipper Incorporated ("XYZ") in 2012 by selling common stock of $12,000,000. He promises the investors in his company a 15% return on their capital.

B. On December 31, 2012, Mitt takes this money and buys $1,000,000 worth of land, $5,000,000 of equipment, $5,000,000 of licenses, and put the remaining $1,000,000 into an operating checking account to fund day-to-day operations. Consequentially, the Free Cash Flow ("FCF") for 2012 is a negative $12,000,000 (-$12,000,000).

C. XYZ has a contract to provide 1,000,000 of their product a year to a distributor. They never sell more or less than 1,000,000 units. So in 2013, XYZ produces and sells 1,000,000 units.

D. The contract runs for 99 years (assume it goes forever).

E. The contract specifies the price the distributor will pay each year. In 2013, the price per unit is $6.50. After 2013, the price escalates as follows:

1739_Calculate the companys horizon value.png

So in 2018, the price should be $8.44/unit if you've done this correctly.
F. XYZ pays 25% of its total revenues in inventory costs and 50% of its total revenues in labor costs every year. If done correctly, this should result in Cost of Goods Sold (COGS) of $4,875,000 in 2013.

G. XYZ depreciates its equipment over 10 years with no salvage value. XYZ amortizes its licenses over 20 years.

H. XYZ's tax rate is 40%.

I. XYZ needs to always have some inventory on hand to keep production constant. As a result, XYZ has a practice in December of each year of buying one month of inventory to have on hand for January. So, in other words, each December XYZ purchases 1/12th of its current year inventory purchase in December to hold it over to the next year. If you've done this correctly, your balance sheet should show $135,416.67 of inventory in 2013 and $148,958.33 of inventory in 2014.

J. XYZ purchases half of this extra inventory on credit. Thus, XYZ always carries an Accounts Payable at the end of every year in the amount of half of the inventory purchase. If you've done this correctly, your balance sheet should show $67,708.33 in 2013 and $74,479.17 in 2014.

K. Starting in 2014, XYZ is forced to add additional equipment and licenses to its operations to keep up with growth. They add the following amounts each year:

1397_Calculate the companys horizon value1.png

So, in 2014 the total equipment should be $5.7M and the total licenses should be $5.7M. The depreciation expense for each year should continue to be the total equipment divided by ten.

The amortization expense for each year should continue to be the total licenses divided by twenty. If you've done this correctly, your depreciation expense should be $500,000 in 2013 and $570,000 in 2014 and your amortization expense should be $250,000 in 2013 and $285,000 in 2014.

L. Mitt wants to hold on to $1,000,000 at the end of every year to have some cash to cover operations and distribute the rest to his shareholders as a dividend. This means $1,207,291.67 of dividends in 2013 if done correctly.


1. What is the value of the XYZ's operations? Calculate the company's horizon value in 2018.

2. Assume that a bank would be willing to lend Mitt as much money as he wants on the following terms: 30 year amortization, 2% annual interest. How much money would Mitt have to borrow to get his investors the 15% return that they require? (If he is borrowing the money, he would do this instead of issuing stock. He still needs to raise $12M, he just would do part of it with debt.

Posted Date: 2/14/2013 11:53:35 PM | Location : United States

Related Discussions:- Calculate the companys horizon value, Assignment Help, Ask Question on Calculate the companys horizon value, Get Answer, Expert's Help, Calculate the companys horizon value Discussions

Write discussion on Calculate the companys horizon value
Your posts are moderated
Related Questions
What creates the APV capital budgeting framework useful for analyzing foreign capital expenditures? The APV framework is a value - additivity method. Since international projects

a) Social marketing is the use of normal marketing methods to achieve the benefits of social change, such as informing the public about the harm of under-age drinking, rather than

State the factors of Small organisations - More creative and dynamic - More flexible to adapt to environmental changes - More informal and small for example some people l

1. Collect three years of recent, financial data (2007 - current), including the Balance Sheet, Income Statement, and Statement of Cash Flow. a. REQUIRED - paper copies o

Balance Sheet: The balance sheet measures the financial position of the business at a particular point in time.  It is also called Statement of Financial Position. The balan

Q. What is Investment Decision ? Investment Decision: - Investment decision as well known as 'Capital Budgeting' is related to the selection of long-term assets or projects in

Q. What do you mean by synergy? Synergy: synergy refers to the greater combined value of merged firms than the sum of the values of individual units. It is something like one p

Deferred coupon bonds are generally issued at a discount price and are used for financing leveraged buyouts. The coupon payment on these types o

How is finance related to the disciplines of accounting and economics? Financial management is fundamentally a combination of economics and accounting. First financial managers

Explain about the Financial risk financial risk are presumed to be constant, changing cost of each type of capital, j, over time must be affected only by changes in the supply