| Assignment #6.Fall 2016 |
| Start with the partial model in the file Ch12 P11 Build a Model.xlsx on the textbook’s Web site, which contains Henley Corporation’s most recent financial statements. Use the following ratios and other selected information for the current and projected years to answer the next questions. |
| Income Statement for the Year Ending December 31 (Millions of Dollars) |
| | 2016 |
| 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 (40%) | $ 52.8 |
| Net income before pref. div. | $ 79.2 |
| Preferred div. | $ 1.4 |
| Net income avail. for com. div. | $ 77.9 |
| Common dividends | $ 31.1 |
| Addition to retained earnings | $ 46.7 |
| Number of shares (in millions) | 10 |
| Dividends per share | $ 3.11 |
| Balance Sheets for December 31 (Millions of Dollars) |
| Assets | 2016 | | Liabilities and Equity | | 2016 |
| Cash | $ 8.0 | | Accounts Payable | | $ 16.0 |
| Short-term investments | 20.0 | | Notes payable | | 40.0 |
| Accounts receivable | 80.0 | | Accruals | | 40.0 |
| Inventories | 160.0 | | Total current liabilities | | $ 96.0 |
| Total current assets | $ 268.0 | | Long-term bonds | | $ 300.0 |
| Net plant and equipment | 600.0 | | Preferred stock | | $ 15.0 |
| Total Assets | $ 868.0 | | Common Stock
(Par plus PIC) | | $ 257.0 |
| | | | Retained earnings | | 200.0 |
| | | | Common equity | | $ 457.0 |
| | | | Total liabilities and equity | | $ 868.0 |
| Projected ratios and selected information for the current and projected years are shown below. |
| Inputs | Actual | Projected | Projected | Projected | Projected |
| | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 |
| 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 | 75% | 75% | 75% | 75% | 75% |
| (Acct. Pay.)/Sales | 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% |
| a. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow. |
| Partial Income Statement for the Year Ending December 31 (Millions of Dollars) |
| | Actual | Projected | Projected | Projected | Projected |
| Income Statement Items | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 |
| Net Sales | $800.0 |
| Costs (except depreciation) | $576.0 |
| Depreciation | $60.0 |
| Total operating costs | $636.0 |
| Earning before int. & tax | $164.0 |
| Partial Balance Sheets for December 31 (Millions of Dollars) |
| | Actual | Projected | Projected | Projected | Projected |
| Operating Assets | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 |
| Cash | $8.0 |
| Accounts receivable | $80.0 |
| Inventories | $160.0 |
| Net plant and equipment | $600.0 |
| Operating Liabilities |
| Accounts Payable | $16.0 |
| Accruals | $40.0 |
| 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. |
| | Actual | Projected | Projected | Projected | Projected |
| Calculation of FCF | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 |
| 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 | na | na |
| Growth in sales |
| c. Calculate the return on invested capital (ROIC=NOPAT/Total net operating capital) and the growth rate in free cash flow. What is the ROIC in the last year of the forecast? What is the long-term constant growth rate in free cash flow (gL is the growth rate in FCF in the last forecast period because all ratios are constant)? Do you think that Hensley's value would increase if it could add growth without reducing its ROIC? (Hint: Growth will add value if the ROIC > WACC/[1+WACC]). Do you think that the company will have a value of operations greater than its total net operating capital? (Hint: Is ROIC > WACC/[1+gL]?) |
| | Actual | Projected | Projected | Projected | Projected |
| | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 |
| Return on invested capital
(ROIC=NOPAT/[Total net operating capital]) | na |
| Weighted average cost of capital (WACC) | na |
| WACC/(1+gL) | | na | na | na |
| WACC/(1+WACC) | | na | na | na |
| d. 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.) How does the current value of operations compare with the current amount of total net operating capital? |
| Weighted average cost of capital (WACC) | 10.5% |
| | Actual | Projected | Projected | Projected | Projected |
| | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 |
| 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 |
| e. Calculate the price per share of common equity as of 12/31/2016 |
| Millions except price per share | Actual |
| | 12/31/16 |
| 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 |
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assignment_6.fin_.4310.fall_.2016_1.xlsx
