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
The Managing Director of your firm is thinking aloud about an appropriate gearing level for the company: "The consultants I spoke to yesterday explained that some academic th

INVESTMENT DECISION AND COST OF CAPITAL In Finance, investment decision is disclose the allocation of funds in fixed assets or long term. This decision is also known as capita

What is the correlation between the efficient portfolio and the risk-free asset? Possible answers are +1, -1, 0, or cannot be calculated.

Explain the aspects of financing decision The financing decision covers two interrelated aspects: (1) capital structure theory (2) capital structure decision.

The following are various types of orders prevalent in the US markets: Market Order : The most common form of order is the market order, which means the order to buy or sell at

Q. What are the Motives of Holding Cash? Motives of Holding Cash: - In every business assets are kept for the reason that they generate profit. But cash is an asset which doesn

Tests for Consistency The consistency of the index numbers have been tested over the years. The most important of these tests are: The time reversal test The

How would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth Plastics and give your views to increase the profit.

Expalin about the Non-Convertible Debentures (NCDs) NCDs are plain debenture securities issued by corporations. They are normally medium term in nature, maturing between 1 to 8

Explain the term- Interest cover Interest cover =Profit before interest and tax (PBIT)/ Interest payable(no. of times) Interest cover represents the safety of earnings tha