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2006 10.9% -0.8% 25.8% 37.3% 2007 10.0% 25.2% 37.3% 2008 10.0% 25.4% 37.3% 2009 10.0% 25.6% 37.3% 2010 10.0% 25.9% 37.3% 2011 10.0% 26.0% 37.3% 2012...

Recalculate the forecasts in Table 8-4 (attached) assuming that the NOPAT profit margin is held steady for the first five years of the forecast and then declines by 0.1 percentage points per year thereafter (keeping all the other assumptions unchanged). Show all calculations.

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sales growth rate 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% NOPAT margin 3.9% 3.8% 3.8% 3.7% 3.7% 3.6% 3.5% 3.4% 3.2% 3.1% 3.1% WC to sales -0.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% LT assets to sales 25.8% 25.2% 25.4% 25.6% 25.9% 26.0% 26.0% 26.3% 26.5% 26.8% 26.8% Debt ratio 37.9% 37.9% 37.9% 37.9% 37.9% 37.9% 37.9% 37.9% 37.9% 37.9% 37.9% After tax cost of debt 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% Income Statement Sales 344,823 379,306 417,236 458,960 504,856 555,342 610,876 671,963 739,160 813,075 894,383 - Net operating profit after tax 13,448 14,414 15,855 16,982 18,680 19,992 21,381 22,847 23,653 25,205 27,726 - Net interest expense after tax 1,069 1,195 1,325 1,469 1,635 1,806 1,986 2,210 2,450 2,725 2,998 = Net Income 12,379 13,218 14,530 15,512 17,044 18,186 19,394 20,636 21,203 22,480 24,728 - Preferred dividends - - - - - - - - - - - = Net income to common 12,379 13,218 14,530 15,512 17,044 18,186 19,394 20,636 21,203 22,480 24,728 Beginning Balance Sheet Beg. Net working capital (2,768) - - - - - - - - - - + Beg. Net long-term assets 88,344 95,585 105,978 117,494 130,758 144,389 158,828 176,726 195,877 217,904 239,695 = Net operating assets 85,576 95,585 105,978 117,494 130,758 144,389 158,828 176,726 195,877 217,904 239,695 Net debt 32,405 36,227 40,166 44,530 49,557 54,723 60,196 66,979 74,237 82,586 90,844 + Preferred stock - - - - - - - - - - 1 + Common stock 53,171 59,358 65,812 72,964 81,201 89,665 98,632 109,747 121,640 135,319 148,850 = Net capital 85,576 95,585 105,978 117,494 130,758 144,389 158,828 176,726 195,877 217,904 239,696 Ratios Operating return on assets 15.7% 15.1% 15.0% 14.5% 14.3% 13.8% 13.5% 12.9% 12.1% 11.6% 11.6% Return on equity 23.3% 22.3% 22.1% 21.3% 21.0% 20.3% 19.7% 18.8% 17.4% 16.6% 16.6% Book value of assets growth 13.6% 11.7% 10.9% 10.9% 11.3% 10.4% 10.0% 11.3% 10.8% 11.2% 10.0% Book value of equity growth 7.6% 11.6% 10.9% 10.9% 11.3% 10.4% 10.0% 11.3% 10.8% 11.2% 10.0% Net operating asset turnover 4.0 4.0 3.9 3.9 3.9 3.8 3.8 3.8 3.8 3.7 3.7 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cash flows Net Income 12,379 13,218 14,530 15,512 17,044 18,186 19,394 20,636 21,203 22,480 24,728 - Change in net working capital (2,768) - - - - - - - - - - - Change in net long-term assets (7,241) (10,393) (11,516) (13,264) (13,631) (14,439) (17,899) (19,151) (22,027) (21,790) 239,695 + Change in net debt 3,822 3,939 4,364 5,027 5,166 5,472 6,784 7,258 8,348 8,259 (90,844) = Free cash flow to equity 6,191 6,764 7,378 7,275 8,579 9,220 8,279 8,744 7,525 8,948 173,578 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Net operating profit after tax 13,448 14,414 15,855 16,982 18,680 19,992 21,381 22,847 23,653 25,205 27,726 - Change in net working capital (2,768) - - - - - - - - - - - Change in net long-term assets (7,241) (10,393) (11,516) (13,264) (13,631) (14,439) (17,899) (19,151) (22,027) (21,790) 239,695 = Free cash flow to capital 3,439 4,021 4,339 3,718 5,049 5,553 3,482 3,696 1,626 3,415 267,421 Equity Valuation Abnormal earnings 5,998 6,926 7,553 7,778 8,437 8,682 8,939 9,003 8,309 8,136 8,950 Abnormal ROE 12.7% 11.7% 11.5% 10.7% 10.4% 9.7% 9.1% 8.2% 6.8% 6.0% 6.0% Free cash flows to equity 6,191 6,764 7,378 7,275 8,579 9,220 8,279 8,744 7,525 8,948 173,578 Asset Valuation Abnormal NOPAT 5,318 5,333 5,787 5,820 6,258 6,275 6,292 6,058 5,045 4,504 4,955 Abnormal operating ROA 6.2% 5.6% 5.5% 5.0% 4.8% 4.3% 4.0% 3.4% 2.6% 2.1% 2.1% Free cash flow to capital 3,439 4,021 4,339 3,718 5,049 5,553 3,482 3,696 1,626 3,415 267,421 Discount factors Equity 0.9042 0.8175 0.7392 0.6683 0.6043 0.5463 0.4940 0.4466 0.4038 0.3651 0.3301 Assets 0.9132 0.8340 0.7617 0.6956 0.6352 0.5801 0.5298 0.4838 0.4418 0.4035 0.3685 Growth factors Equity 1.00 1.12 1.24 1.37 1.53 1.69 1.85 2.06 2.29 2.54 2.80 Assets 1.00 1.12 1.24 1.37 1.53 1.69 1.86 2.07 2.29 2.55 2.80 Cost of capital Equity 0.106 Assets 0.095 Valuation 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Abnormal earnings 5,998 6,926 7,553 7,778 8,437 8,682 8,939 9,003 8,309 8,136 8,950 Discount factor 0.9042 0.8175 0.7392 0.6683 0.6043 0.5463 0.4940 0.4466 0.4038 0.3651 Present value of abnormal earnings 5,423 5,662 5,583 5,198 5,098 4,743 4,416 4,021 3,356 2,971 Beginning book value 53,171 PV abnormal earnings 2006 to 2015 46,472 PV abnormal earnings 2016 on 544,646 644,289
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This question was asked on Oct 11, 2010.

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