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    DCF and fair market value

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    Consider the financial statements below. The firm's cost of capital is 10%. The firm is stable and the long-term growth rate for all items is expected to be 4%. Use the information below to estimate the fair market value of the companies equity as of year-end 2013.

    2013 Income Statement
    Sales 500
    Cost of goods sold 250
    SG&A expense 50
    EBIT 200
    Interest expense 40
    Taxable income 160
    Taxes 64
    Net Income 96

    2012 Balance Sheet
    Cash 50 Accounts payable 70
    Accounts receivable 100 Total current liab. 70
    Inventory 200
    Total current assets 350 Long-term debt 400

    Gross fixed assets 1,000 Common stock 200
    Accumulated depreciation 200 Retained earnings 480
    Net fixed assets 800 Total equity 680
    Total 1,150 Total 1,150

    2013 Balance Sheet
    Cash 70 Accounts payable 100
    Accounts receivable 130 Total current liab. 100
    Inventory 220
    Total current assets 420 Long-term debt 450

    Gross fixed assets 1,120 Common stock 250
    Accumulated depreciation 270 Retained earnings 470
    Net fixed assets 850 Total equity 720
    Total 1,270 Total 1,270

    Please use DCF and show work and briefly describe rationale of calculation so I can understand the process better.

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    Solution Preview

    Please see the attached spreadsheet for the discounted cash flow analysis ...

    Solution Summary

    The spreadsheet contains a simple valuation model that can be used to find the equity value of a company. The model is simple in nature, but can be used as a starting point for more complex valuation projects.