You are on page 1of 11

Assignment 2 (due 2/17

)
Answer the following questions using the financial statements and the additional data provided below.
If necessary, make assumptions and explain them with your answer.
1.
2.
3.
4.
5.
6.
7.

Find NOPLAT for years 1 to 6.
Calculate FCF for years 1 to 6.
Can we assume that the market value of debt equal to its book value? Why or why not? Explain.
Compute WACC.
Estimate continuing value at the end of year 5.
Estimate the enterprise value.
Estimate the intrinsic value per share of the stock.

Income Statement and Reorganized Balance Sheet
$ million
Income statement
Revenues
Operating costs
Depreciation
Operating profits

Today

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

3,777.1
(3,245.1)
(82.9)
449.1

4,041.5
(3,435.2)
(97.0)
509.2

4,304.2
(3,658.5)
(103.3)
542.3

4,583.9
(3,896.3)
(110.0)
577.6

4,859.0
(4,130.1)
(116.6)
612.2

5,126.2
(4,357.3)
(123.0)
645.9

5,382.5
(4,575.1)
(129.2)
678.2

(14.0)
435.1

(14.0)
495.2

###
528.3

(14.0)
563.5

(14.0)
598.2

(14.0)
631.9

(14.0)
664.2

(130.5)
304.6

(148.6)
346.6

(158.5)
369.8

(169.1)
394.5

(179.5)
418.7

(189.6)
442.3

(199.2)
464.9

Interest
Earnings before taxes
Taxes
Net income
1

Accounts payable has been netted against inventory to determine operating working capital.

Additional Data Provided
Operating-profit tax rate

30.0%

Shares outstanding. This company currently does not have nonoperating assets. $ 57. and the marginal tax rate is 30 percent. the cost of equity is 12 percent.6 Current share price. . The long-term growth rate in cash flows is 5 percent and the RONIC is 15 percent. millions 65.00 The pretax cost of debt is 8 percent.

818.9 1.7 202.419.8 280.153.141.782.656.5 256.1 280.5 280.062.062.0 2.8 280.0 2.5 2.818.699.538.1 .699.5 2.1 1.9 280.943.8 1.7 215.721.9 229.7 1.186.6 1.3 2.936.306.936.186.906.7 ### 1.6 2.6 2.5 1.5 2.2 1.616.5 1.8 242.3 2.5 1.3 2.6 2.833.2 1.422.9 1.026.8 269.2 1.1 2.5 1.422.510.050.306.4 1.7 280.Reorganized balance sheet Operating working capital Property and equipment Invested capital Debt Shareholders' equity Invested capital 1 Today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 188.2 1.

.

382.435.2 542.6 612.27 404.126.2) 577.6 Year 3 Year 4 Year 5 Year 6 4.1) (4.5 162.1 134.2 173.2) (3.0 5.Question 1 NOPLAT.45 474.583.3 152.3 183.5) (97.2 (3.2 645.1) (82.7 .0) (129.2 5.0) (116.72 314.5 4.1 203.9) 449.3) 509.777.9 4.9 678.77 356.130.77 452.0) (103.041.6) (123.357.5 (3.4 Year 1 Year 2 4.575.3) (4.67 428.245.3) (4.6 193.1) (110. $ million Revenues Operating costs Depreciation Operating profits Operating taxes NOPLAT Today 3.304.859.658.896.70 379.1 (3.

9 (13.Question 2 Free cash flow.1) (208.9 Year 3 404.8) (226.0) (221.7) 359.2 Year 6 474.2 Year 5 452.3 Year 1 356.3 Year 4 428.6) 304. $ million NOPLAT Depreciation Gross cash flow Increase in working capital Capital expenditures Free cash flow Today 314.6 (116.5 (97.9) 278.2) (202.9 (12.9) 331.5 Year 2 379.8) (231.0) 575.0) 453.6 (103.7 (129.9) 397.4) (229.8 (13.0) 514.4 (13.4 (14.6) 545.4 .7) 237.4) 261.4 (82.3 (110.5 (13.1 (123.2) 603.3) 482.

0% 12. Answer: No because market value is less than that of its Current debt value this is due to the fact that the company actually owes less Equity value Shares outstanding. % 5. millions Times: Share price.739.0% Cost of capital.739. % 7. $ million 65.7 Proportion of total capital.2 4.019. % 30.5 3. $ million 280. $ Equity value.Question 3 Can we assume that the market value of debt equal to its book value? Why or why not? Explain.0% 100.6 57. % 8.2 Weighted average cost of capital Source of capital Debt Equity Enterprise value Market value.0% After-tax cost of capital.0% Marginal tax rate.0% 93.6% 12.0% .00 3.

% 0. Contribution to weighted average.55% This answer is based on the assumption that __________The Weighted Average for the company will increase .2% 11.4% 11.mpany actually owes less in debt.

6 304.8 196.739.5 212.28 This answer is based on the assumption that _____Value per share is muc WACC.5 3.9 261.2 61.778. 6 & 7 $ million Free cash flow (FCF) Discounted FCF Continuing value Year 1 2 3 4 5 237. % Long-term growth rate.1 278. % 11.00% 15.765.8 PV of explicit FCFs PV of continuing value PV of operations 1.019.012.Questions 5.5 2.990.4 210.1 4.4 200.9 192. $ - This company does not have nonoperating assets.00% . % RONIC.5 3. 4.831.0 Midyear adjustment 3.7 280.55% 5.8 331.3 Don't make any change in this cell (C14) as it has a form PV of nonoperating assets Enterprise value Debt Equity value Value per share.

ue per share is much lower than expected 474. ating assets.7243 .14) as it has a formula to automatically make mideyear adjust for PV of operations.

0.6666666667 316.4828659572 0.799 .333333 0.0655 4831.