The financial statements of Lioi Steel Fabricators are shown below, with the actual results for 2002 and the projections for 2003. Free cash flow is expected to grow at a 6 percent rate after 2003. The weighted average cost of capital is 11 percent.

a. If operating capital as of 12/31/2002 is $502.2 million, what is the free cash flow for 12/31/2003?

b. What is the horizon value as of 12/31/2003?

c. What is the value of operations as of 12/31/2002?

d. What is the total value of the company as of 12/31/2002?

e. What is the price per share for 12/31/2002?

Start with the partial model in the file Ch 12 P11 Build a Model.xls from 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.

a. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow.

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 (that is, the same as the constant growth rate in sales) by the end of the forecast period.

c. Calculate operating profitability (OP NOPAT/Sales), capital requirements (CR Operating capital/Sales), and expected return on invested capital (EROIC Expected NOPAT/Operating capital at beginning of year). Based on the spread between expected ROIC and WACC, do you think that the company will have a positive market value added (MVA Market value of company Book value of company Value of operations Operating capital)?

d. Calculate the value of operations and MVA. (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 growth beyond the horizon is 6 percent.)

e. Calculate the price per share of common equity as of 12/31/2002.

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Income Statement for the Year Ending December 31 (Millions of Dollars Except for Per Share Data) Net sales Costs (except depreciation) Depreciation Total operating costs Actual 2002 Projected 2003 $500.0 $530.0 360.0 381.6 37.5 $397.5 39.8 $421.4 $102.5 108.6 13.9 Earnings before interest and tax Less interest Earnings before taxes Taxes (40%) 35.4 Net income before preferred dividends $ 53.2 Preferred dividends Net income avail. for common dividends $ 47.2 Common dividends Addition to retained earnings Number of shares Dividends per share $ 40.8 $ 88.6 6.0 16.0 $92.6 37.0 $ 55.6 7.4 $ 48.2 $ 29.7 $ 6.4 $ 18.5 10 10 $ 4.08 $ 2.97