Corporate Finance ( Calculating with Excel): Forcast Income Statement, Partial Balance Sheet, Calculate Free Cash Flow, Calculate Returns
Calculate these concepts: Forcast Income Statement, Partial Balance Sheet, Calculate Free Cash Flow, Calculate Returns
Everything needs to be solved in Excel, using Excel Functions.
Values should be related to one another.
Solution
MBA 6050 Fall 2020
Graded Problem #5
Following is The Brother Corporations most recent financial statements. Use the following ratios and other selected information for the current and projected years to answer the next questions.
Income Statement for the Year Ending December 31 (Millions of Dollars)
2020
Net Sales $ 800.0
Costs (except depreciation) $ 576.0
Depreciation $ 60.0
Earning before int. & tax $ 164.0
Less interest $ 32.0
Earning before taxes $ 132.0
Taxes (25%) $ 33.0
Net income before pref. div. $ 99.0
Preferred div. $ 9.0
Net income avail. for com. div. $ 90.0
Common dividends $ 30.0
Addition to retained earnings $ 60.0
Number of shares (in millions) 10
Dividends per share $ 3.00
Tax rate 25%
Balance Sheets for December 31 (Millions of Dollars)
Assets 2020 Liabilities and Equity 2020
Cash $ 8.0 Accounts Payable $ 16.0
Short-term investments 20.0 Notes payable 40.0
Accounts receivable 80.0 Accruals 40.0
Inventories 160.0 Total current liabilities $ 96.0
Total current assets $ 268.0 Long-term bonds $ 300.0
Net plant and equipment 600.0 Preferred stock $ 100.0
Total Assets $ 868.0 Common Stock
(Par plus PIC) $ 257.0
Retained earnings 211.0
Common equity $ 468.0
Total liabilities and equity $ 868.0
Projected ratios and selected information for the current and projected years are shown below.
Inputs Actual Projected Projected Projected Projected
12/31/20 12/31/21 12/31/22 12/31/23 12/31/24
Sales Growth Rate 15% 10% 6% 6%
Costs/Sales 72% 72% 72% 72% 72%
Depreciation/(Net PPE) 10% 10% 10% 10% 10%
Cash/Sales 1% 1% 1% 1% 1%
(Acct. Rec.)/Sales 10% 10% 10% 10% 10%
Inventories/Sales 20% 20% 20% 20% 20%
(Net PPE)/Sales 75% 75% 75% 75% 75%
(Acct. Pay.)/Sales 2% 2% 2% 2% 2%
Accruals/Sales 5% 5% 5% 5% 5%
Tax rate 40% 40% 40% 40% 40%
Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5% 10.5%
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 Projected Projected Projected Projected
Income Statement Items 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24
Net Sales $800.0
Costs (except depreciation) $576.0
Depreciation $60.0
Earning before int. & tax $164.0
Partial Balance Sheets for December 31 (Millions of Dollars)
Actual Projected Projected Projected Projected
Operating Assets 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24
Cash $8.0
Accounts receivable $80.0
Inventories $160.0
Net plant and equipment $600.0
Operating Liabilities
Accounts Payable $16.0
Accruals $40.0
b. Calculate free cash flow for each projected year. Also calculate the growth 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 12/31/20 12/31/21 12/31/22 12/31/23 12/31/24
Operating current assets
Operating current liabilities
Net operating working capital
Net PPE
Total net operating capital
NOPAT
Investment in total net operating capital na
Free cash flow na
Growth in FCF na na
Growth in sales
c. Calculate the return on invested capital (ROIC=NOPAT/Total net operating capital) and the growth rate in free cash flow. What is the ROIC in the last year of the forecast? What is the long-term constant growth rate in free cash flow (gL is the growth rate in FCF in the last forecast period because all ratios are constant)? Do you think that Hensley’s value would increase if it could add growth without reducing its ROIC? (Hint: Growth will add value if the ROIC > WACC/[1+WACC]). Do you think that the company will have a value of operations greater than its total net operating capital? (Hint: Is ROIC > WACC/[1+gL]?)
Actual Projected Projected Projected Projected
12/31/20 12/31/21 12/31/22 12/31/23 12/31/24
Return on invested capital
(ROIC=NOPAT/[Total net operating capital])
Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5%
WACC/(1+gL) na na na
WACC/(1+WACC) na na na
d. Calculate the current value of operations. (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 the annual growth rate beyond the horizon is equal to the growth rate at the horizon.) How does the current value of operations compare with the current amount of total net operating capital?
Weighted average cost of capital (WACC) 10.5%
Actual Projected Projected Projected Projected
12/31/20 12/31/21 12/31/22 12/31/23 12/31/24
Free cash flow
Long-term constant growth in FCF
Horizon value -0
Present value of horizon value
Present value of forecasted FCF
Value of operations (]PV of HV] + [PV of FCF])
Total net operating capital
e. Calculate the price per share of common equity as of 12/31/2020
Millions except price per share Actual
12/31/20
Value of operations
+ Value of short-term investments
Total value of company
Total value of all debt
Value of preferred stock
Value of common equity
Divided by number of shares
Price per share
