Finance 4-6pages

FIN 319 – Case #3

This case is focused on valuation, payout policy and capital structure. Capital structure is the mix of debt

vs. equity the company utilizes to finance its operations and is one of the most important decisions

management must make. Capital structure has a direct effect on the value of the firm. Payout policy

describes the choices management make regarding distribution of cash to the shareholders to include

dividends and share repurchases. For this case you will value Precision Castparts, analyze the current

capital structure and payout policies and recommend what you believe to be the best capital structure

and payout policy for the firm.

• The first step should be to forecast the financial statements (income statement and balance

sheet) for the next 5 years. Please use the operating forecast assumptions provided on page 2

of the case.

• The next step should be to calculate the value the firm. Please calculate the total value of the

firm and the value of its equity on a per share basis based on free cash flow (FCF).

• Describe the current payout policy for the company (if any)

• Recommend what you believe to be the most appropriate payout policy for the company. This

should include whether you believe the firm should have a payout, amount of payout and form

of payout. Please provide supporting evidence for your recommendation.

• Review and discuss the benefits and costs associated with including debt in the capital structure.

What are the key considerations the company should evaluate in establishing a capital structure

and why are these items relevant to the decision. These could be items related to the nature of

the industry or company specific.

• Apply the Weighted Average Cost of Capital technique reviewed in class to calculate the optimal

capital structure (please clearly document assumptions).

• Summarize and support your specific capital structure recommendation for the company. The

recommended capital structure may be different than the calculated optimal level.

I am interested in the structured frameworks you use to solve the problem/s, assumptions made,

analysis, recommendation and ability to clear communicate. Grading will consider:

• Critical Thinking: Have you formulated meaningful questions (what are the critical issues or problem), synthesized information and financial data, considered alternatives or improvements,

proposed position / solutions.

• Analysis: Have you chosen the appropriate analytical framework/s to utilize and appropriately applied them. Assess quality of supporting evidence, key assumptions are identified and a clear

recommendation supported by the analysis.

• Communication: The paper must be written clearly with a central message and logical organization. Ideas and recommendations are well supported. The case should contain an

executive summary, any relevant background information, analysis, and recommendation.

Please ensure correct spelling, grammar and clear formatting of financial exhibits. Use of tables

and charts are often an efficient means to communicate financial information.

Papers should be between 4-6 pages in length plus any exhibits in an appendix.

Forecast Assumptions

Please use the following assumptions to help forecast the financial statements for the company over the

next 5 years (2015 through 2019)

Revenue for 2015 & 2016 will grow at 12% per year, 2017 & 2018 will grow at 10% per year and 2019

will grow at 8%

For each of the next 5 years please use the following percent of revenue assumptions to model the

financial statements unless otherwise noted:

• Cost of Goods Sold at 65%

• Selling and Administrative at 7%

• Cash and Equivalents required for operations at 4%

• Accounts Receivable at 16%

• Inventory at 36%

• Prepaid expenses and all other current assets totaling 1%

• Gross Property, Plant and Equipment at 40%

• Goodwill at 68% of sales in 2015 and 65% of sales in each of the remaining years

• Net Acquired Intangible assets at 36% of sales in 2015 and dropping 1 percentage point each

year.

• Other Assets plus Investments in unconsolidated investments totaling 6% of sales each year

• Accounts Payable at 11%

• Accrued liabilities totaling 6%

• Pension, Other Long-term liabilities and Deferred taxes will remain at 2014 levels over the

forecast period.

The corporate tax rate is 32% of pretax operating income

Depreciation and Amortization charges are included in the above cost assumptions. In total they

represent 7% of Gross Property, Plant and Equipment each year.

At the end of the 5 year forecast period, the terminal growth rate is forecast to be 3.75%

The company’s most recent financial statements (2014) are post on D2L

Weighted Average Cost of Capital (WACC) should be based on Case 1, plus any changes you would like

to incorporate based on feedback.

Items Considered for Grading

Absent Satisfactory Excellent

Valuation 0 1 2 3 4 Comment

Proforma Financial Statements

Free Cash Flow Forecast

Weighted Average Cost of Captial

Value of Firm

Equity Value per share

Payout Policy

Description of Current Payout Policy

Test for Cash available to payout

Payout Recommendation

Level of payout (amount)

Form of payout (type)

Capital Structure

Current Capital Structure and WACC

Optimal Structure based on WACC

Cost of Equity

Cost of Debt

Capital Structure Recommendation

Communication

Overall Presentation

Executive Summary

Supporting evidence

Synthesis & Recommendation

Grammar, spelling

Use of Exhibits, Charts