Review this material before teaching. Calculations are checked; independent expert review remains pending. Do not distribute answers before students attempt the exercise.
5 minutes: introduce goal and participation choices. 10 minutes: independent accounting attempt and discussion. 10 minutes: UFCF. 10 minutes: enterprise-to-equity bridge. 10 minutes: debrief and assign follow-up.
A warehouse buys equipment for 144 cash at the start of the year. Walk through the first year across all three statements.
depreciation: 144 ÷ 6 = 24
net Income: − 144 ÷ 6 × (1 − 0.25) = -18
cfo: 144 ÷ 6 × 0.25 = 6
cash: − 144 + 144 ÷ 6 × 0.25 = -138
net PPE: 144 − 144 ÷ 6 = 120
retained Earnings: − 144 ÷ 6 × (1 − 0.25) = -18
Depreciation reduces pre-tax income; apply the tax shield.
Add depreciation back to net income for CFO; record capex in CFI.
Cash plus net PP&E movement equals retained earnings movement.
If there were no current cash tax benefit, what would happen to cash, and why?
If a six-year useful life changes to three years with the same tax capacity, what happens to first-year earnings and cash? Separate timing from lifetime economics.
Without a current cash tax benefit, CFO has no cash tax saving and cash falls by the full capex. Net income may still reflect deferred taxes if recognition criteria are met; ask the candidate to state that assumption.
A warehouse pays 180 in cash for equipment at the start of the year. The equipment has a 6-year straight-line life and no salvage value. At a 30% tax rate, walk through the full first-year changes across all three statements.
Amounts $m. Six-year straight-line life, no salvage. Book=tax depreciation. 30% tax shield usable immediately. No financing, WC or dividends. The company has sufficient other taxable income to absorb the deduction.
depreciation: 180 ÷ 6 = 30
net Income: − 180 ÷ 6 × (1 − 0.3) = -21
cfo: 180 ÷ 6 × 0.3 = 9
cash: − 180 + 180 ÷ 6 × 0.3 = -171
net PPE: 180 − 180 ÷ 6 = 150
retained Earnings: − 180 ÷ 6 × (1 − 0.3) = -21
A company has $90 million of EBIT, $18 million of depreciation and amortization, and $26 million of capital expenditures. Its operating working capital increases by $12 million. Assume a 25% tax rate. What is its unlevered free cash flow?
ufcf: 90 × (1 − 0.25) + 18 − 26 − 12 = 47.5
Tax operating income, add back noncash D&A, subtract reinvestment.
UFCF belongs to all capital providers; financing is reflected in WACC.
Why don’t we subtract interest expense? How would the cash-flow definition and discount rate change for a levered equity DCF?
If growth requires a larger working-capital investment, why might higher revenue growth reduce near-term cash flow?
Levered cash flow reflects interest and net borrowing and is discounted at cost of equity to equity value. Keep cash-flow definition and discount rate consistent; do not simply swap rates.
A company has $120 million of EBIT, $24 million of depreciation and amortization, and $35 million of capital expenditures. Its operating working capital increases by $10 million. Assume a 30% tax rate. What is its unlevered free cash flow?
Enter your answer in millions. Operating working capital excludes cash and financing debt.
ufcf: 120 × (1 − 0.3) + 24 − 35 − 10 = 63
A company has 50 million basic shares, 10 million options with strike 8, and stock price 20. Using treasury stock method, find net new shares and diluted shares.
new Shares: 10 − 10 × 8 ÷ 20 = 6
diluted Shares: 50 + 10 − 10 × 8 ÷ 20 = 56
Exercise produces proceeds; use proceeds to repurchase shares at market price.
Only the net increment is dilution.
What if the strike were above the stock price?
At a much higher share price, how does the net dilution from these same options change, and why?
Out-of-the-money options add no diluted shares in treasury stock method; do not allow negative dilution.
A company has 60 million basic shares, 12 million in-the-money options at a $10 strike, and a $25 share price. Calculate net new shares and diluted shares with the treasury stock method.
All options exercisable and in the money. Ignore taxes and other dilutive securities.
new Shares: 12 − 12 × 10 ÷ 25 = 7.2
diluted Shares: 60 + 12 − 12 × 10 ÷ 25 = 67.2
A logistics company has EBITDA 84, a 7.5x EV/EBITDA multiple, debt 210, excess cash 54 and 30 million diluted shares. Find EV, equity value and per-share value.
ev: 84 × 7.5 = 630
equity: 84 × 7.5 − 210 + 54 = 474
price: (84 × 7.5 − 210 + 54) ÷ 30 = 15.8
Apply an enterprise multiple to EBITDA.
Subtract debt and add excess cash, then divide by diluted shares.
If 40 of new debt is retained as cash with no other changes, what happens to equity and EV?
If the quoted multiple rises by one turn with EBITDA and net debt fixed, quantify the equity-value effect per share.
Equal debt and excess cash issuance leaves net debt, operating EV and equity value unchanged under the stated no-fee/no-repricing assumptions.
A logistics company has EBITDA of 96, an EV/EBITDA multiple of 8×, debt of 250, excess cash of 58, and 32 million diluted shares. Calculate EV, equity value and value per share.
Amounts $m except share price; no preferred, NCI or other claims. Debt at stated value.
ev: 96 × 8 = 768
equity: 96 × 8 − 250 + 58 = 576
price: (96 × 8 − 250 + 58) ÷ 32 = 18
Acquirer net income 120, shares 40. Target net income 24. Cash purchase 300 funded from excess cash earning 4% pre-tax. Tax 25%. Find pro forma EPS and accretion.
standalone: 120 ÷ 40 = 3
proforma: (120 + 24 − 300 × 0.04 × (1 − 0.25)) ÷ 40 = 3.375
accretion: ((120 + 24 − 300 × 0.04 × (1 − 0.25)) ÷ 40) ÷ (120 ÷ 40) − 1 = 0.125
Subtract after-tax foregone interest from combined earnings.
Divide by unchanged shares; compare to standalone EPS.
Can a deal be EPS-accretive but destroy value? Explain without relying only on EPS.
How would a higher cash yield change the accretion result, holding everything else fixed? Explain the opportunity cost.
Yes. Accretion can result from financing and earnings-yield differences even if price exceeds economic value. Evaluate incremental risk-adjusted cash flows versus consideration; EPS is not NPV.
The acquirer has net income of 150 and 50 million shares. Target net income is 30. A cash purchase of 400 uses excess cash earning 5% pre-tax, with a 25% tax rate. Calculate standalone EPS, pro forma EPS and accretion.
Amounts $m. Full-year ownership, no synergies, fees, purchase accounting amortization or new shares. Enter accretion as decimal.
standalone: 150 ÷ 50 = 3
proforma: (150 + 30 − 400 × 0.05 × (1 − 0.25)) ÷ 50 = 3.3
accretion: ((150 + 30 − 400 × 0.05 × (1 − 0.25)) ÷ 50) ÷ (150 ÷ 50) − 1 = 0.1
Record original attempts, assistance and retries separately. A repeated or changed-number match is not an independent retention test. Use a distinct follow-up problem reviewed by a qualified facilitator before claiming transfer. Record the explanation with a simple rubric: assumptions, mechanics, interpretation; give concrete comments rather than a readiness score.
At 7×, EV is $504 million and equity is $344 million. At 8×, EV is $576 million and equity is $416 million. At 9×, equity is $488 million. Asking equity of $430 million implies EV of $590 million and an 8.1944× multiple. Excluding $8 million unverified EBITDA leaves $64 million; at 8×, equity is $352 million. Recommendations require human judgment and diligence, not an automatic right answer.