Question

BJ was forecasting expansion of sales in the Midwest and Western parts of the country. To accommodate the forecast growth, it was planning on investing $2.4m over the next 18 months, of which $2m will be spent in 2019 and the remaining amount in 2020. It was anticipated this investment would fulfill the company's need for facilities for several years. Construction of a new warehouse in the MidWest was expected to be completed in early 2020. BJ's accountant forecast total depreciation expense of $213,000 and $333,000 for 2019 and 2020, respectively. Management anticipates that inventories will be the same proportional relationship to sales that it had in 2018 despite disruptions due to adding the new plant. Operating margins were expected to be consistent with past experience (and the temporary drop in inventory would not affect the cost of goods as a percentage of sales). The company expects a future effective tax rate of 35% due to recent changes in the tax law. Mr. Bones expected BJ's dividend payout to increase to 25% of net income in the foreseeable future. Mr. Bones was forecasting sales growth at 30% in 2019, but falling to 20% the following year (2020). He was concerned what that might mean for the level of bank financing needed and set about to forecast the income statement and balance sheet for the firm over the next two years. Unless otherwise noted, he was going to assume the most recent years' operating ratios would prevail in the future. He had a few questions he wanted to answer before going to the bank: • How had BJ performed over the last few years? Was the Bank going to be happy with BJ's performance? How much external financing does Bioject need to grow at the forecast rate? What would happen if growth was only 20% in the next year but grew at the forecast rates in subsequent years? Bioject: Part 2 - Valuation Suppose BJ believes it will reach maturity at the end of 2020. Thereafter, cash flow growth is expected to average 4% and COGS is expected to level off at 55% of sales; SG&A is estimated to be 22% of sales. With mature growth, CapX and depreciation of $350,000 is forecast in all years starting in 2021 and thereafter. Since growth will be at steady state, no additions to working capital are forecast beyond 2020. BJ believes all forecast cash is operational, and not surplus. • How much is BJ worth as a firm given this forecast? They estimate their WACC at 9%. • If BioJect has a 2,250 million shares of equity outstanding and plans to maintain a permanent debt level of $850,000 for purposes of valuation, what is the value of their equity on a per share basis?

Answer 1

1...Income statement	g=	30%	20%	20%
For yrs. Ending 12/31	2018	2019	2020	2021
Net sales	23505	30557	36668	44001
Cost of sales	13612	17696	21235	25482	Sales*57.91% (2018 ratio)
Gross profit	9893	12861	15433	18520
SG&A	7471	9712	11655	13986	Sales*31.78%
Depreciation	213	213	333	350	Given
Net interest expense	94	94	94	94	Fixed
Pre-tax opg. Income	2115	2842	3351	4090
Income taxes	925	995	1173	1431	Pretax *25%
Net income	1190	1847	2178	2658
Dividends	240	462	545	665	NI*25%
Additions to R/E	950	1385	1634	1994	Ni*75%
Balance Sheet
Assets
Cash	706	918	1101	1322	(706*1.3)&(918*1.2)
Accounts Receivable	3652	4748	5697	6837	similar
Inventories	2190	2847	3416	4100	similar
Total current assets	6548	8512	10215	12258
Gross plant & eqpt.	4163	6163	6563	6913	Given
Acc. Depn.	1728	1941	2274	2624	Given
Net P&E	2435	4222	4289	4289	Given
Total assets	8983	12734	14504	16547
Liabilities
Current maturities of LT Debt	125	125	125	125	Given
Accounts payable	1440	1872	2246	2696	similar
Accrued expenses	1653	2149	2579	3094	similar
Total current liabilities	3218	4146	4950	5915
LT debt	875	750	625	500
Common stock	1135	1135	1135	1135	Given
Retained earnings	3880	5265	6899	8893	Beg.R/E+addns. To R/E
Total Shareholders' Equity	5015	6400	8034	10028
Total liabilities	9108	11296	13609	16443
External funds needed	-125	1438	895	104

2… Income statement	g=	20%	20%	20%
For yrs. Ending 12/31	2018	2019	2020	2021
Net sales	23505	28206	33847	40617
Cost of sales	13612	16334	19601	23522	Sales*57.91% (2018 ratio)
Gross profit	9893	11872	14246	17095
SG&A	7471	8965	10758	12910	Sales*31.78%
Depreciation	213	213	333	350	Given
Net interest expense	94	94	94	94	Fixed
Pre-tax opg. Income	2115	2599	3061	3741
Income taxes	925	910	1071	1309	Pretax *25%
Net income	1190	1690	1989	2432
Dividends	240	422	497	608	NI*25%
Additions to R/E	950	1267	1492	1824	Ni*75%
Balance Sheet
Assets
Cash	706	847	1017	1220	(706*1.3)&(918*1.2)
Accounts Receivable	3652	4382	5259	6311	similar
Inventories	2190	2628	3154	3784	similar
Total current assets	6548	7858	9429	11315
Gross plant & eqpt.	4163	6163	6563	6913	Given
Acc. Depn.	1728	1941	2274	2624	Given
Net P&E	2435	4222	4289	4289	Given
Total assets	8983	12080	13718	15604
Liabilities
Current maturities of LT Debt	125	125	125	125	Given
Accounts payable	1440	1728	2074	2488	similar
Accrued expenses	1653	1984	2380	2856	similar
Total current liabilities	3218	3837	4579	5470
LT debt	875	750	625	500
Common stock	1135	1135	1135	1135	Given
Retained earnings	3880	5147	6639	8463	Beg.R/E+addns. To R/E
Total Shareholders' Equity	5015	6282	7774	9598
Total liabilities	9108	10869	12978	15568
External funds needed	-125	1211	740	36
EFN has reduced in 2019 (lower g=20%)
reducing the EFN needed for the yrs. 2020 & 2021 also

3..
Free cash flow(FCF)= EBIT*(1-Tax rate)+den.-CAPEX-Changes to NWC
	2018	2019	2020
Pre-tax opg. Income	2115	2841.6	3351.32
Add:Net interest expense	94	94	94
1.EBIT	2209	2935.6	3445.32
2.Less:Income taxes	-925	-994.56	-1172.96
3.Add:Depreciation	213	213	333
4.Less: CAPEX		-2000	-400
5.Less: Changes to WC
(from workings to 1--g=30% in 2019)
a.Total current assets	6548	8512	10215
b.Total current liabilities	3218	3837	4579
NWC(a-b)	3330	4676	5636
5.Changes to working capital		-1346	-960
FCF(1 to 5)		-1192	1245
Terminal FCf=FCF2020*(1.04)/(9%-4%)
1245*(1.04)/(9%-4%)			25896
Total FCf		-1192	27141
PV F at 9%(1/1.09^Yr.n)		0.917431	0.84168
PV of FCFs at 9%		-1093.36	22844.2
NPV/value of firm=(sum)	21751
Less: value of Debt	850
Value of equity('000s)	20901
No.of equity shares('000s)	2250000
Value /share	0.0093