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a. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow. |
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Partial Income Statement for the Year Ending December 31 (Millions of Dollars) |
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Actual |
Projected |
Projected |
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Income Statement Items |
2018/12/31 |
12/31/19 |
12/31/20 |
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Net Sales |
$800.0 |
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Costs (except depreciation) |
$576.0 |
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Depreciation |
$60.0 |
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Total operating costs |
$636.0 |
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Earning before int. & tax |
$164.0 |
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Partial Balance Sheets for December 31 (Millions of Dollars) |
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Actual |
Projected |
Projected |
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Operating Assets |
2018/12/31 |
12/31/19 |
12/31/20 |
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Cash |
$8.0 |
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Accounts receivable |
$80.0 |
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Inventories |
$160.0 |
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Net plant and equipment |
$600.0 |
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Operating Liabilities |
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Accounts Payable |
$16.0 |
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Accruals |
$40.0 |
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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. |
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Actual |
Projected |
Projected |
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Calculation of FCF |
2018/12/31 |
12/31/19 |
12/31/20 |
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Operating current assets |
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Operating current liabilities |
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Net operating working capital |
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Net PPE |
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Total net operating capital |
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NOPAT |
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Investment in total net operating capital |
na |
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Free cash flow |
na |
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Growth in FCF |
na |
na |
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Growth in sales |
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Projected ratios and selected information for the current and projected years are shown below. Inputs Actual Projected Projected 2018/12/31 Projected Projected 12/31/21 12/31/19 12/31/20 12/31/22 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 (Acct. Pay.)/Sales 75% 75% 75% 75% 75% 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%
Homework Answers
ANSWER:-
Price per share = $ 99.46
Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. You can also understand the mathematics making use of [+] / [-] sign appearing in the first column. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $ mn except number of shares which is in mn and Price per share which is $ / shares.
| Parameter | Linkage | Actual | Projected | Projected | Projected | Projected |
| Year | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | 12/31/2022 | |
| Year number, n | 1 | 2 | 3 | 4 | ||
| y-o-y growth in sales | gi | 15% | 10% | 6% | 6% | |
| Net Sales | A = Ai-1 x (1 + gi) | 800 | 920.00 | 1,012.00 | 1,072.72 | 1,137.08 |
| Costs | B = 72% x A | 662.40 | 728.64 | 772.36 | 818.70 | |
| Depreciation | C = 10% x I (below) | 69.00 | 75.90 | 80.45 | 85.28 | |
| Cash | D = 1% x A | 8.00 | 9.20 | 10.12 | 10.73 | 11.37 |
| Acc. Receivables | E = 10% x A | 80.00 | 92.00 | 101.20 | 107.27 | 113.71 |
| Inventory | F = 20% x A | 160.00 | 184.00 | 202.40 | 214.54 | 227.42 |
| Accounts Payable | G = 2% x A | 16.00 | 18.40 | 20.24 | 21.45 | 22.74 |
| Accruals | H = 5% x A | 40.00 | 46.00 | 50.60 | 53.64 | 56.85 |
| Net PPE | I = 75% x A | 600.00 | 690.00 | 759.00 | 804.54 | 852.81 |
| Working capital | J = (D + E + F) - (G + H) | 192.00 | 220.80 | 242.88 | 257.45 | 272.90 |
| Increase in working capital | K = Ji+1 - Ji | 28.80 | 22.08 | 14.57 | 15.45 | |
| Capital Expenditure | L = Ii + C - Ii-1 | 159.00 | 144.90 | 125.99 | 133.55 | |
| EBIT x (1 - Tax rate) | M = (A - B - C) x (1 - 40%) | 113.16 | 124.48 | 131.94 | 139.86 | |
| [+] Depreciation | C | 69.00 | 75.90 | 80.45 | 85.28 | |
| [-] Increase in working capital | K | 28.80 | 22.08 | 14.57 | 15.45 | |
| [-] Capital expenditure | L | 159.00 | 144.90 | 125.99 | 133.55 | |
| FCFF | N = M + C - K - L | (5.64) | 33.40 | 71.83 | 76.14 | |
| WACC | R | 10.5% | ||||
| Terminal growth rate | g | 6% | ||||
| Horizon value | O = N2022 x (1 + g) / (R - g) | 1,793.56 | ||||
| PV factor | PVF = (1 + R)-n | 0.90498 | 0.81898 | 0.74116 | 0.67073 | |
| PV of FCFF | PV = PVF x FCFF | (5.10) | 27.35 | 53.24 | 51.07 | |
| [+] PV of Horizon value | PVHV = O x PVF2022 | 1,203.00 | ||||
| Value of operations (V0) | V0 = PV + PVHV | 1,329.56 | ||||
| [+] Value of short-term investments | P | 20.00 | ||||
| Total value of company | Q = V0 + P | 1,349.56 | ||||
| [-] Total value of all debt | R (= Notes payables + long term bonds) | 340.00 | ||||
| [-] Value of preferred stock | S | 15.00 | ||||
| Value of common equity | T = Q - R - S | 994.56 | ||||
| Number of shares outstanding (mn) | U | 10.00 | ||||
| Price per share ($ / share) |
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