CHAPTER 9- PROSPECTIVE ANALYSIS

PROBLEM 9-4 (90 MINUTES)

Historical Figures horizontal forecast
Year 2 Year 3 Year 4 Year 5 Year 6
Sales growth 8.50% 10.65% 10.65% 10.65% 10.65%
Net profit margin (net income/ sales) 6.71% 8.22% 8.22% 8.22% 8.22%
NWC turn (sales/ avg NWC) 8.98 9.33 9.33 9.33 9.33
FA Turn ( sales/ avg FA) 1.67 1.64 1.64 1.64 1.64
Total operating asset/ total equity 1.96 2.01 2.01 2.01 2.01
cost of equity 12.50%

($ Thousands)
Sales 25,423 28,131 31,127 34,443 38,112
Net Income ($ Mill) 1,706 2,312 2,558 2,831 3,132
Net working capital 2,832 3,015 3,336 3,692 4,085
Fixed Assets 15,232 17,136 18,961 20,981 23,216
Total operating assets 18,064 20,151 22,297 24,673 27,301
L-T Liabilities 8,832 10,132 11,211 12,405 13,727
Total Stocholder's Equity ($ Mill) 9,232 10,019 11,086 12,267 13,574

Residual income computation

Net Income 2,558 2,831 3,132
Beginning Equity 10,019 11,086 12,267
Required Equity Returm 12.50% 12.50% 12.50%
Expected Earnings 1,252 1,386 1,533
Residual income computation 1,306 1,445 1,599
Discount factor 1 1 1

Present Value of Residual Income 1,161 1,142 1,123

Cum PV residual income 1,161 2,303 3,425
Terminal Value of abnormal earnings
Beg book value of Equity
Value of Equity- Abnormal Earnings
Common Share Outstandings (Mill)
per share
Year 7 20 × 8 20 × 8
10.65% 10.65% 3.50%
8.22% 8.22% 8.22%
9.33 9.33 9.33
1.64 1.64 1.64
2.01 2.01 2.01

42,171 46,663 48,297

3,466 3,835 3,969
4,520 5,001 5,176
25,689 28,425 29,420
30,209 33,426 34,596
15,189 16,807 17,395
15,020 16,619 17,201

3,466 3,835 3,969

13,574 15,020 16,619
12.50% 12.50% 12.50%
1,697 1,958 1,892
1,769 1,958 1,892
1 1

1,105 1,086
4,530 5,616
11,665
10,019
27,301
1,373
16