Question

	2013	2014
Sale		$2100
Costs of goods sold		$1200
Depreciation expense		$225
Interest expense		$175
Current assets	$1000	$1300
Total fixed assets	$3500	$4000
Accumulated depreciation	$1250	This can be determined from the information given
Current liability	$900	$975
Long-term debt	$1500	$1350
Common stock	$400	This can be determined from the information given

The average tax rate is 35% and the dividend payout ratio is 65%

OCF = 725

NCS = 500

Change in NWC = 225

FCF = 0

CFC = 325

CFS = - 325

1. Use a 20% growth rate and forecast next year’s financial statements assuming the following: sales and cost of goods sold increase at the same rate; interest expense remains the same percentage of long-term debt; depreciation expense remains the same percentage of total fixed assets; current assets, current liabilities, and fixed assets increase at the same rate as sales; no new equity is issued. What is the external financing needed?
2. Under the same assumptions as above, forecast the next five years of growth using debt as the plug. Calculate free cash flow for the forecasted years. Does this seem sustainable in the long run?
3. If the free cash flows will grow by 3% per year indefinitely after five years have passed and the required return is 15%, what is the “terminal value” of the firm in five years?
4. What is the value of the firm today, based on the above?

Answer 1