Chapter 11
InputsActualProjectedProjectedProjectedProjected
20112012201320142015
Sales Growth Rate15%10%6%6%
Costs / Sales72%72%72%72%72%
Depreciation / Net PPE10%10%10%10%10%
Cash / Sales1%1%1%1%1%
Acct. Rec. / Sales10%10%10%10%10%
Inventories / Sales20%20%20%20%20%
Net PPE / Sales75%75%75%75%75%
Acct. Pay. / Sales2%2%2%2%2%
Accruals / Sales5%5%5%5%5%
Tax rate40%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)
Assets2011Liabilities and Equity2011
Cash$ 8.0Accounts Payable$ 16.0
Marketable Securities20.0Notes payable40.0
Accounts receivable80.0Accruals40.0
Inventories160.0Total current liabilities$ 96.0
Total current assets$ 268.0Long-term bonds$ 300.0
Net plant and equipment600.0Preferred stock$ 15.0
Total Assets$ 868.0Common Stock
(Par plus PIC)$ 257.0
Retained earnings200.0
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)
ActualProjectedProjectedProjectedProjected
20112012201320142015
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)
ActualProjectedProjectedProjectedProjected
Operating Assets20112012201320142015
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.
ActualProjectedProjectedProjectedProjected
Calculation of FCF20112012201320142015
Operating current assets
Operating current liabilities
Net operating working capital
Net PPE
Net operating capital
NOPAT
Investment in operating capitalna
Free cash flowna
Growth in FCFna
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)?
ActualProjectedProjectedProjectedProjected
20112012201320142015
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 WACCna
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.)
ActualProjectedProjectedProjectedProjected
20112012201320142015
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