Question

A firm with manufacturing facilities is currently running at 40% capacity. Its B/S is summarized

as follows (in millions of dollars):

A/R  2.0

Inventory  8.0

Plant assets  22.0

Financial liabilities   8.0

Common equity  24.0

The firm is generating sales of $64.0 million from its current production, earning an after-tax

operating profit margin of 7.5%. [NOPAT/Sales  =  7.5%]

Required:

a.

Calculate   the   firm’s   return   on   net   operating   assets,   RNOA   =   NOPAT/NOA,   it’s   A/R

turnover, its INV turnover = Sales/Inventory, its turnover on plant assets = Sales/Plant

assets, its total assets turnover = Sales/Total assets.

(6 marks)

b.

The firm has a required rate of return of 10% for its operations [WACC = 10%]. Value the

firm (its core operations) using the formula:

Value of the firm = NOA +

[

RNOA

−

WACC

]

∗

NOA

WACC

where   NOA   its   net

operating assets.

(4 marks)

c.

Suppose the firm were to sell at 80% capacity of its plant with no change in selling prices

or profit margins (and so earned revenues of $64*2=$128 million). A/R and Inventory

would increase to maintain the same A/R and Inventory turnovers as before. Calculate

the   value   of   the   firm.

(6 marks)

Identify   the   aspects   of   the   operations   that   have

increased the value of the firm over that calculated in (b).

(3 marks)

d.

Repeat the calculations in (c.) if the firm were to sell products at 100%.

(6 marks)