Keller FI504 Week 7 Project 13-10 Corporate Valuation The financial statements of Lioi Steel Fabricators are shown below

, with the act ual results for 2010 and projections for 2011. Free cash flow is expected to gro w at a 6 percent rate after 2011. The WACC is 11 percent. Income Statement for the Year Ending December 31 (Millions of Dollars Except for Per Share Data) Actual Projected 2010 2011 Net sales $530.0 Costs (except depreciation) 381.6 Depreciation 39.8 Total Operating Costs $421.4 EBIT $108.6 Less Interest 16.0 Earnings before Taxes $ 92.6 Taxes (40%) 37.0 Net Income before preferred dividends Preferred dividends 7.4 Net income available for common dividends $ 48.2 Common Dividends $ 29.7 Addition to retained earnings $ 18.5 Number of Shares 10 Dividends per share $ 2.97 $500.0 360.0 37.5 $397.5 $102.5 13.9 $ 88.6 35.4 $ 53.2 6.0 $ $ $ 47.2 40.8 6.4 10 $ 4.08 $ 55.6

Balance Sheet for December 31 (Millions of Dollars) Actual Assets 2010 Cash $ 5.3 Marketable Securities 49.9 Accounts Receivables 53.0 Inventories 106.0 Total Current Assets $214.2 $226.1 Net Plant and Equipment 375.0 397.5 Total Assets $589.2 Liabilities and Equity Accounts Payable $ 9.6 Notes Payable 69.9 Accruals 27.5 Total current liabilities $107.0 Long term bonds 140.8 148.2

Projected 2011 $ 5.6 51.9 56.2 112.4 $623.6 $ 11.2 74.1 28.1 $113.4

Preferred stock Common Stock (par plus PIC) Retained earnings Common Equity Total Liabilities and equity

35.0 160.0 146.4 $306.4 $589.2

37.1 160.0 164.9 $324.9 $623.6

a. If operating capital as of 12/31/2010 is $502.2 million, what is the free cas h flow for 12/31/2011? Free cash flow = NOPAT (net operating profit after tax) â NOPAT = EBIT X (1-tax rate) = 108.6 X (1-0.4) = $65.16 million Investment in capital

Operating capital = Net operating working capital (NOWC) + Net Plant and Equipme nt NOWC = (cash + AR + Inv) â (AP + Accruals) = ($5.6 + $56.2 + $112.4) â ($11.2 + $28.1) = $134.9 million. Total operating capital = NOWC + Net Plant and Equip = 134.9+397.5 = 532.4 million Investment in Capital = Change in operating capital (2011 â 2010) = 532.4-502.2 = $30.2 million Free cash flow = 65.16-30.2 = $34.96 million b. What is the horizon value as of 12/31/2011? The cash flows grow at a constant 6% after 2011 the horizon value will be in yea r 2011 Horizon Value in 2011 = FCF in 2012 / (WACC-growth rate) FCF in 2012 = 34.96 X 1.06 = 37.0576 Horizon Value = 37.0576 / (11%-6%) = $741.152 million c. What is the value of operations as of 12/31/2010? Value of operations in 2011 = FCF + Horizon value = 34.96 + 741.152 = 109.112 Value of operations in 2010 = 109.112/1.11 = $699.20 million d. What is the total value of the company as of 12/31/2010? Value of company = Value of operations + marketable securities = 699.20+49.9 = $749.10 million e. What is the price per share for 12/31/2010? Value of equity = Value of company â debt â preferred stock = $749.10 â ($69.9 + $140.8) - $35.0 = $503.4 million Price per share = 503.4/number of shares

= 503.4/10 = $50.34

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