(13-11)

Build a Model:

Corporate Valuation Start with the partial model in the file Ch13 P11 Build a Model.xls on the textbook’s Web site. The Henley Corporation is a privately held company specializing in lawn care products and services. The most recent financial statements are shown below.

Income Statement for the Year Ending December 31 (Millions of Dollars Except for Per Share Data)

2010 Net sales $ 800.0 Costs (except depreciation) 576.0 Depreciation 60.0 Total operating costs $ 636.0 Earnings before interest and taxes $ 164.0 Less interest 32.0 Earnings before taxes $ 132.0 Taxes (40%) 52.8 Net income before preferred dividends $ 79.2 Preferred dividends 1.4 Net income available for common dividends $ 77.9 Common dividends $ 31.1 Addition to retained earnings $ 46.7 Number of shares (in millions) 10 Dividends per share $ 3.11 Balance Sheet for December 31 (Millions of Dollars)

2010 2010 Assets Liabilities and Equity Cash $ 8.0 Accounts payable $ 16.0 Marketable securities 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 15.0 Common stock (par plus PIC) 257.0 Retained earnings 200.0 Common equity $457.0 Total assets $868.0 Total liabilities and equity $868.0 Projected ratios and selected information for the current and projected years are shown below.

Actual Projected 2010 2011 2012 2013 2014 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 resource Chapter 13: Corporate Valuation, Value-Based Management and Corporate Governance 553 Actual Projected 2010 2011 2012 2013 2014 Accounts receivable/Sales 10% 10% 10% 10% 10%

Inventories/Sales 20 20 20 20 20 Net PPE/Sales 75 75 75 75 75 Accounts payable/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 sheet that are necessary for calculating free cash flow.