15. 1/10/2007
Chapter Solution for Ch 15-11 Build a Model
This model provides answers to the end-of-the-chapter spreadsheet problem. Inputs 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) Actual 2007 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% Projected 2008 15% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% Projected 2009 10% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% Projected 2010 6% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% Projected 2011 6% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5%
Income Statement for the Year Ending December 31 (Millions of Dollars) 2007 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) Dividends per share 10 $3.11
Balance Sheets for December 31 (Millions of Dollars) Assets 2007 Cash $8.0 Marketable Securities 20.0 Accounts receivable 80.0 Inventories 160.0 Total current assets $268.0 Net plant and equipment 600.0 Total Assets $868.0
Liabilities and Equity Accounts Payable Notes payable Accruals Total current liabilities Long-term bonds Preferred stock Common Stock
(Par plus PIC)
2007 $16.0 40.0 40.0 $96.0 $300.0 $15.0 $257.0 200.0 $457.0 $868.0
Retained earnings Common equity Total liabilities and equity
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 2007 Net Sales Costs (except depreciation) Depreciation Total operating costs Earning before int. & tax $800.0 $576.0 $60.0 $636.0 $164.0 Projected 2008 $920.0 $662.4 $69.0 $731.4 $188.6 Projected 2009 $1,012.0 $728.6 $75.9 $804.5 $207.5 Projected 2010 $1,072.7 $772.4 $80.5 $852.8 $219.9 Projected 2011 $1,137.1 $818.7 $85.3 $904.0 $233.1
Partial Balance Sheets for December 31 (Millions of Dollars) Actual Operating Assets 2007 Cash Accounts receivable Inventories Net plant and equipment Operating Liabilities Accounts Payable Accruals $8.0 $80.0 $160.0 $600.0
Projected 2008 $9.2 $92.0 $184.0 $690.0
Projected 2009 $10.1 $101.2 $202.4 $759.0
Projected 2010 $10.7 $107.3 $214.5 $804.5
Projected 2011 $11.4 $113.7 $227.4 $852.8
$16.0 $40.0
$18.4 $46.0
$20.2 $50.6
$21.5 $53.6
$22.7 $56.9
b. Calculate free cash flow for each projected year. Also calculate growth the 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 2007 2008 2009 2010 2011 Operating current assets 248.0 285.2 313.7 332.5 352.5 Operating current liabilities 56.0 64.4 70.8 75.1 79.6 Net operating working capital 192.0 220.8 242.9 257.5 272.9 Net PPE 600.0 690.0 759.0 804.5 852.8 Net operating capital 792.0 910.8 1,001.9 1,062.0 1,125.7 NOPAT 98.4 113.2 124.5 131.9 139.9 Investment in operating capital na 118.8 91.1 60.1 63.7 Free cash flow na (5.6) 33.4 71.8 76.1 Growth in FCF na na -692.1% 115.1% 6.0% Growth in sales 15.0% 10.0% 6.0% 6.0%
c. Calculate operating profitability (OP=NOPAT/Sales), capital requirements (CR=Operating capital/Sales), and return on invested capital (ROIC=NOPAT/Operating capital at beginning of year). Based on the spread between ROIC and WACC, do you think that the company will have a positive market value added (MVA= Market value of company - book value of company = Value of operations - Operating capital)? Actual 2007 Operating profitability (OP=NOPAT/Sales) 12.3% Projected 2008 12.3% Projected 2009 12.3% Projected 2010 12.3% Projected 2011 12.3%
Capital requirement 99.0% 99.0% (CR=Operating capital/Sales) Return on invested capital (ROIC=NOPAT/Operating capital at start of year) na 14.3% Weighted average cost of capital (WACC) na 10.5% Spread between ROIC and WACC na 3.8% Because the spread is positive, the company should have a positive MVA.
99.0% 13.7% 10.5% 3.2%
99.0% 13.2% 10.5% 2.7%
99.0% 13.2% 10.5% 2.7%
d. Calculate the value of operations and MVA. (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 growth beyond the horizon is 6 percent.) Actual 2007 Free cash flow Long-term constant growth in FCF Weighted average cost of capital (WACC) Horizon value FCF + horizon value Value of operations (PV of FCF + HV) Operating capital Market value added (MVA=Market value of company - book value of company = Value of operations - Operating capital) Projected 2008 (5.6) 10.5% 10.5% (5.6) 1,329.6 792.0 537.6 Projected 2009 33.4 10.5% 33.4 Projected 2010 71.8 10.5% 71.8 Projected 2011 76.1 6.0% 10.5% 1,793.6 1,869.7
e. Calculate the price per share of common equity as of 12/31/2007. Actual 2007 Value of Operations Plus Value of Mkt. Sec. Total Value of Company Less Value of Debt Less Value of Pref. Value of Common Stock Number of shares Price per share 1,329.6 20.0 1,349.6 340.0 15.0 994.6 10 99.5