Finance Free Cash Flow HW Questions. Coursework

Please answers 2 questions by use formula and do the calculation in very detail.
QUESTION 1 HAS TWO PARTS FOR A TOTAL OF 14 MINUTES Jones Group Inc. is the parent company of Midwest Pipeline Inc., a mature, stable natural gas transmission pipeline company in the United States. In 1998, Jones Group established DCom Corp., a 100 percent owned subsidiary whose mandate is to install and commercialize a long-haul data communications network.  Tom Anderson, Chief Executive Officer of DCom, hires Vala and Associates to provide additional insight into capital markets and corporate finance issues. During the initial meeting in December 2000 with Jim Vala, CFA, Anderson comments:  “I do not believe the full value of DCom is reflected in the market price of Jones Group equity. I think DCom’s full value can be determined using the free cash flows to the firm model.”  Vala has the following notes from his initial meeting with Anderson:   The data communications network was built on existing property alongside Midwest Pipeline’s transmission pipelines.  The major network construction is nearing completion and DCom’s sales force is now in place   Network data traffic is expected to grow at a rate of 50 percent annually through 2003 and 15 percent annually thereafter.   Beginning in 2004, DCom’s free cash flows to the firm are expected to grow at a sustainable rate of 15 percent annually.   The weighted average cost of capital for DCom is 17 percent.   The appropriate tax rate for DCom is 30 percent.   A. Calculate the total firm value of DCom at the end of year 2000, using the free cash flows to the firm (FCFF) model.   (10 minutes)  B. State whether total firm value as determined by the FCFF model is appropriate to assess the value that DCom should contribute to the market price of Jones Group equity.  Support your response with one reason.   (4 minutes)  
 2000 2001 2002 2003 Summary Income Statement (for the year) Actual Projection Projection Projection Total Revenue 70.00$     105.00$     157.50$     236.25 $     Total Operating Expenses 30.45$     45.68$       68.51$       102.77 $     Earnings Before Interest, Taxes, 39.55$     59.32$       88.99$       133.48 $     Depreciation & Amortization (EBITDA) Depreciation and Amortization 69.00$     129.00$     136.50$     144.00 $     Earnings Before Interest & Taxes (EBIT) (29.45)$    (69.68)$      (47.51)$      (10.52) $      Interest Expense 44.10$     79.20$       87.75$       87.75 $       Pre-tax Income (73.55)$    (148.88)$   (135.26)$   (98.27) $      Income Tax Expense (22.07)$    (44.66)$      (40.58)$      (29.48) $      Net Income (51.49)$    (104.22)$   (94.68)$      (68.79) $      2000 2001 2002 2003 Summary Balance Sheet (year end) Actual Projection Projection Projection Total Current Assets 113.12$   130.93$     222.07$     253.75 $     Net Fixed Assets 391.00$   662.00$     575.50$     481.50 $     Total Assets 504.12$   792.93$     797.57$     735.25 $     Total Current Liabilities 5.60$        8.63$          12.95$       19.42 $       Long-term Debt 490.00$   880.00$     975.00$     975.00 $     Total Liabilities 495.60$   888.63$     987.95$     994.42 $     Common Stock 60.00$     60.00$       60.00$       60.00 $       Retained Earnings (51.49)$    (155.70)$   (250.38)$   (319.17) $   Total Shareholder's Equity 8.51$        (95.70)$      (190.38)$   (259.17) $   Total Liabilities and Equity 504.12$   792.93$     797.57$     735.25 $     Dividends -$          -$            -$            $            Capital Expenditures 400.00$     50.00$       50.00 $       Changes in Working Capital 5.19$          (4.32)$        (6.47) $        (excluding cash and short-term debt)Exhibit 1-3 DCom Corp. Summary Income Statement and Balance Sheet (U.S. $ millions, except per share data) December. 31

QUESTION 2 HAS ONE PART FOR A TOTAL OF 8 MINUTES.  In mid-December 2001, Jim Vala has another meeting with Bill Jones.  During the meeting, Jones says:  “As you know, Jones Group has recently divested DCom. At the time of that transaction, we signed a 20-year lease that gives DCom access to our pipeline property. We have just been informed that, as a result of current market conditions, DCom will default on the lease payments. We need that cash to service the debt that was retained by Jones Group at the time of the divestiture.”  Jones continues:  “We should consider a new dividend policy to conserve cash. Dividends per share will total $1.85 in 2001. I think we should reduce our dividend by 60 percent and maintain that lower level for 2002 and 2003 to allow us to pay off some debt. In 2004, we will increase our dividend back to $1.85, then grow the dividend at 8 percent annually thereafter.”  The required rate of return on Jones Group equity is 11 percent for the foreseeable future.  Calculate, using a dividend discount model (DDM) approach, the expected share price of Jones Group equity on January 1, 2002, given the new dividend policy described by Jones. Show your calculations.   (8 minutes)  Dividend Practice Question   Beth Knight, CFA, and David Royal, CFA, are independently analyzing the value of Bishop, Inc. stock.  Bishop paid a dividend of $1 last year.  Knight expects the dividend to grown by 10% in each of the next 3 years after which it will grow at a constant rare of 4% per year.  Royal also expects temporary growth grate of 10% followed by a constant growth rate of 4%, but he expects the supernormal growth to last for only 2 years.  Knight estimates that the RR on Bishop stock is 9%, but Royal believes the RR is 10%.  Royal's valuation of Bishop stock is approximately:   A. equal to Knight's valuation  B. $5 less than Knight's valuation  C. $5 more than Knight's valuation.  2002 2003 2004Terminal Value Projected Divided = Dn $0.74 $0.74 $1.85 $2.00 Divided Growth Rate = g 8% Required Rate of Retrun = r 11% 11% 11% 11% Terminal Value = (D2004 x (1+g)) / (r2004 - g) $66.67 <--Present Value of Dividends @ 11% $0.67 $0.60 $1.35 Present Value of Terminal Value @ 11% $48.75 Share Price Based on DDM $51.37