Intermediate finance 2

| September 29, 2018

Chapter 11

Inputs
Actual
Projected
Projected
Projected
Projected

2011
2012
2013
2014
2015

Sales Growth Rate

15%
10%
6%
6%

Costs / Sales
72%
72%
72%
72%
72%

Depreciation / Net PPE
10%
10%
10%
10%
10%

Cash / Sales
1%
1%
1%
1%
1%

Acct. Rec. / Sales
10%
10%
10%
10%
10%

Inventories / Sales
20%
20%
20%
20%
20%

Net PPE / Sales
75%
75%
75%
75%
75%

Acct. Pay. / Sales
2%
2%
2%
2%
2%

Accruals / Sales
5%
5%
5%
5%
5%

Tax rate
40%
40%
40%
40%
40%

Weighted average cost of
capital (WACC)
10.5%
10.5%
10.5%
10.5%
10.5%

Income Statement for the Year Ending December 31 (Millions of
Dollars)

2011

Net Sales
$ 800.0

Costs (except depreciation)
$ 576.0

Depreciation
$ 60.0

Total operating costs
$ 636.0

Earning before int. & tax
$ 164.0

Less interest
$ 32.0

Earning before taxes
$ 132.0

Taxes (40%)
$ 52.8

Net income before pref. div.
$ 79.2

Preferred div.
$ 1.4

Net income avail. for com.
div.
$ 77.9

Common dividends
$ 31.1

Addition to retained earnings
$ 46.7

Number of shares (in
millions)
10

Dividends per share
$ 3.11

Balance
Sheets for December 31 (Millions of Dollars)

Assets
2011

Liabilities and Equity
2011

Cash
$ 8.0

Accounts Payable
$ 16.0

Marketable Securities
20.0

Notes payable
40.0

Accounts receivable
80.0

Accruals

40.0

Inventories
160.0

Total current liabilities
$ 96.0

Total current assets
$ 268.0

Long-term bonds
$ 300.0

Net plant and equipment
600.0

Preferred stock
$ 15.0

Total Assets
$ 868.0

Common Stock
(Par plus PIC)
$ 257.0

Retained earnings
200.0

Common equity
$ 457.0

Total liabilities and
equity
$ 868.0

a. Forecast the parts of
the income statement and balance sheets necessary to calculate free cash
flow.

Partial
Income Statement for the Year Ending December 31 (Millions of Dollars)

Actual
Projected
Projected
Projected
Projected

2011
2012
2013
2014
2015

Net Sales
$ 800.0

Costs (except depreciation)
$ 576.0

Depreciation
$ 60.0

Total operating costs
$ 636.0

Earning before int. & tax
$ 164.0

Partial Balance Sheets for December 31 (Millions of Dollars)

Actual
Projected
Projected
Projected
Projected

Operating Assets
2011
2012
2013
2014
2015

Cash
$ 8.0

Accounts receivable
$ 80.0

Inventories
$ 160.0

Net plant and equipment
$ 600.0

Operating Liabilities

Accounts Payable
$ 16.0

Accruals
$ 40.0

b. Calculate free cash
flow for each projected year. Also
calculate the growth rates of free cash flow each year to ensure that there
is constant growth (i.e., the same as the constant growth rate in sales) by
the end of the forecast period.

Actual
Projected
Projected
Projected
Projected

Calculation of FCF
2011
2012
2013
2014
2015

Operating current assets

Operating current liabilities

Net operating working capital

Net PPE

Net operating capital

NOPAT

Investment in operating
capital
na

Free cash flow
na

Growth in FCF
na

Growth in sales

c. Calculate operating
profitability (OP=NOPAT/Sales), capital requirements (CR=Operating
capital/Sales), and return on invested
capital (ROIC=NOPAT/Operating capital at beginning of year). Based on the spread between ROIC and WACC, do you think that
the company will have a positive market value added (MVA= Market value of company – book value of
company = Value of operations – Operating capital)?

Actual
Projected
Projected
Projected
Projected

2011
2012
2013
2014
2015

Operating
profitability
(OP=NOPAT/Sales)

Capital
requirement
(CR=Operating capital/Sales)

Return
on invested capital
(ROIC=NOPAT/Operating capital at

start of year)
na

Weighted average cost of
capital (WACC)
na

Spread between ROIC and WACC
na

d. Calculate the value of
operations and MVA. (Hint: first
calculate the horizon value at the end of the forecast period, which is equal
to the value of operations at the end of the forecast period. Assume that the annual growth rate beyond
the horizon is 6 percent.)

Actual
Projected
Projected
Projected
Projected

2011
2012
2013
2014
2015

Free cash flow

Long-term constant growth in
FCF

Weighted average cost of
capital (WACC)
10.5%
10.5%
10.5%
10.5%
10.5%

Horizon value

FCF + horizon value

Value of operations (PV of
FCF + HV)

Operating capital

Market
value added (MVA=Market value of company – book value of company = Value of
operations – Operating capital)

e. Calculate the price
per share of common equity as of 12/31/2009.

Actual

2011

Value of Operations

Plus Value of Mkt. Sec.

Total Value of Company

Less Value of Debt

Less Value of Pref.

Value of Common Stock

Number of shares

Price per share

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