| Starting with this partial model, which contains financial statements and other information, complete sections a thru g. All sections in yellow must be completed using formulas. All data must be computed using formulas referencing data from the financial statements and other data. Manual entry of data for solutions will result in zero points for the particular calculation. |
| Income Statement for the Year Ending December 31 (Millions of Dollars) |
| 2019 |
| 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 (25%) | $ 33.0 |
| Net income before pref. div. | $ 99.0 |
| Preferred div. | $ 9.00 |
| Net income avail. for com. div. | $ 90.0 |
| Common dividends | $ 30.0 |
| Addition to retained earnings | $ 60.0 |
| Number of shares (in millions) | 10 |
| Dividends per share | $ 3.00 |
| Tax Rate | 25% |
| Balance Sheets for December 31 (Millions of Dollars) |
| Assets | 2019 | Liabilities and Equity | 2019 |
| Cash | $ 28.0 | Accounts Payable | $ 16.0 |
| Short-term investments | 40.0 | Notes payable | 30.0 |
| Accounts receivable | 80.0 | Accruals | 24.0 |
| Inventories | 180.0 | Total current liabilities | $ 70.0 |
| Total current assets | $ 328.0 | Long-term bonds | $ 300.0 |
| Net plant and equipment | 600.0 | Preferred stock | $ 90.0 |
| Total Assets | $ 928.0 | Common Stock
(Par plus PIC) | $ 257.0 |
| Retained earnings | 211.0 |
| Common equity | $ 468.0 |
| Total liabilities and equity | $ 928.0 |
| Key Assumptions: Operating ratios remain unchanged from values in most recent year. Sales are expected to increase, 15%, 10%, 6%, and 6% during the next four years. The tax rate will remain at 25% and WACC is assumed to be 15% for all years. This data should be in a separate input table and referenced for the calculations when needed. This means you create an input table for the key assumptions data. |
| a. Calculate the actual operating and projected ratios. Also fill in the tax rate and WACC for each year. (6.75pts) |
| Inputs | Actual | Projected | Projected | Projected | Projected |
| 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 |
| Sales Growth Rate |
| Costs/Sales |
| Depreciation/(Net PPE) |
| Cash/Sales |
| (Acct. Rec.)/Sales |
| Inventories/Sales |
| (Net PPE)/Sales |
| (Acct. Pay.)/Sales |
| Accruals/Sales |
| Tax rate |
| Weighted average cost of capital (WACC) |
| b. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow. (13.75pts) |
| Partial Income Statement for the Year Ending December 31 (Millions of Dollars) |
| Actual | Projected | Projected | Projected | Projected |
| Income Statement Items | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 |
| Net Sales |
| Costs (except depreciation) |
| Depreciation |
| Total operating costs |
| Earning before int. & tax |
| Partial Balance Sheets for December 31 (Millions of Dollars) |
| Actual | Projected | Projected | Projected | Projected |
| Operating Assets | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 |
| Cash |
| Accounts receivable |
| Inventories |
| Net plant and equipment |
| Operating Liabilities |
| Accounts Payable |
| Accruals |
| c. 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. (11.25pts) |
| Actual | Projected | Projected | Projected | Projected |
| Calculation of FCF | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 |
| Operating current assets |
| Operating current liabilities |
| Net operating working capital |
| Net PPE |
| Total net operating capital |
| NOPAT |
| Investment in total net operating capital | na |
| Free cash flow | na |
| Growth in FCF (gL) | na |
| Growth in sales |
| d. Calculate the return on invested capital (ROIC=NOPAT/Total net operating capital) and the growth rate in free cash flow. Compare to the WACC. (2.5pts) |
| Actual | Projected | Projected | Projected | Projected |
| 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 |
| Return on invested capital (ROIC=NOPAT/[Total net operating capital]) |
| Weighted average cost of capital (WACC) |
| e. Calculate the current value of operations. (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 equal to the growth rate at the horizon.) (6.5pts) |
| Weighted average cost of capital (WACC) |
| Actual | Projected | Projected | Projected | Projected |
| 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | 12/31/23 |
| Free cash flow |
| Long-term constant growth in FCF |
| Horizon value |
| Present value of horizon value |
| Present value of forecasted FCF |
| Value of operations (]PV of HV] + [PV of FCF]) |
| Total net operating capital |
| f. Calculate the price per share of common equity as of 12/31/2018. (3.25pts) |
| Millions except price per share | Actual |
| 12/31/19 |
| Value of operations |
| + Value of short-term investments |
| Total value of company |
| − Total value of all debt |
| − Value of preferred stock |
| Value of common equity |
| Divided by number of shares |
| Price per share |
| g. If the actual price of the stock is $69.75, what is your assessment of the proposed operating plan? What are some actions the company can take to improvement the operating plan? Explain how such actions would improve the plan. (6 pts) |
Fks96
Ch12buildamodel.xlsx
