1. Exhibit 12.13 presents free cash flow and economic profit forecasts for Apparelo, a $250 million company that produces men's dothing. Appar e Co is expected to grow revenues, operating profits, and free cash flow at 6 percent per year indefinitely. The company earns a return on new invested capital (RONIC) of 15 percent. The company's cost of capital is 10 per cent. Using the key value driver formula, what is the continuing value as of year 57 Using discounted-cash-flow analysis, what is the value of opera tions for Apparelo? What percentage of Apparelo's total operating value is attributable to the continuing value? Apparel Free Cash Flows and Economie Pro 15 . NORA 09 84 re 4 NORA E 23 10 11 153 Foop TA 23 2 Since growth is stable for Apparelo, you decide to start the continuing value with year 3 cash flows fie, cash flows in year 3 and beyond are part of the continuing value). Using the key value driver formula (and data pro- vided in Question 1), what is the continuing value as of year 2? Using dis- counted cash flow, what is the value of operations for Apparelo? What per centage of ApparelCo's total operating value is attributable to the continuing value? How does this result compare with your answer in Question 1? 3. Using the economic profit formula, what is the continuing value for Appar- elCo as of year 57 Using discounted economic profit, what the value of REVIEW QUESTIONS 281 operations for ApparelCo? What percentage of ApparelCo's total operating value is attributable to current invested capital, to interim economic profits. and to economic profits in the continuing value period? 4. Since growth is stable for ApparelCo, you decide to start the continuing value with year 3 economic profits (ie, economic profits in year 3 and beyond are part of the continuing value). Using the economic profit for mula (and data provided in Question 1), what is the continuing value as of year 2? Using discounted economic profit, what is the value of opera- tions for ApparelCo? What percentage of ApparelCo's total operating value is attributable to the continuing value? How does this compare with the answer you obtained in Question 2? EXHIBIT 12.13 ApparelCo: Free Cash Flows and Economic Profit S million Today 2500 Year 1 2650 Year 2 2809 Year 3 2978 Year 4 315.6 Revenues Operating costs Operating margin 1225.0 25.0 1238.SI 26.5 12528 28.1 126801 29.8 1284.11 316 Continuing Years value Key value drivers. % 3346 3546 Return on new (3011) (31921 invested capital 33.5 355 Growth rate Operating taxes 18.4) (89) Cost of capital 25.1 26.6 15 6 25 10 Operating taxes NOPLAT 16.31 18.8 16.61 199 17.01 21.1 174 223 1791 237 Net investment Free cash flow (7.51 18.0 11311.9 18.4 126 1891 13.4 19.5 142 110.0 15.1 Economic profit NOPLAT 19.9 21.1 223 23.7 25.1 26.6 Invested capital Cost of capital, Capital charge 132.5 10.0 13.3 1405 100 14.0 148.9 100 14.9 157.8 10.0 158 1673 10.0 16.7 1773 100 17.7 Economic profit 6.6 70 7.4 79 8.4 8.9 1. Exhibit 12.13 presents free cash flow and economic profit forecasts for Apparelo, a $250 million company that produces men's dothing. Appar e Co is expected to grow revenues, operating profits, and free cash flow at 6 percent per year indefinitely. The company earns a return on new invested capital (RONIC) of 15 percent. The company's cost of capital is 10 per cent. Using the key value driver formula, what is the continuing value as of year 57 Using discounted-cash-flow analysis, what is the value of opera tions for Apparelo? What percentage of Apparelo's total operating value is attributable to the continuing value? Apparel Free Cash Flows and Economie Pro 15 . NORA 09 84 re 4 NORA E 23 10 11 153 Foop TA 23 2 Since growth is stable for Apparelo, you decide to start the continuing value with year 3 cash flows fie, cash flows in year 3 and beyond are part of the continuing value). Using the key value driver formula (and data pro- vided in Question 1), what is the continuing value as of year 2? Using dis- counted cash flow, what is the value of operations for Apparelo? What per centage of ApparelCo's total operating value is attributable to the continuing value? How does this result compare with your answer in Question 1? 3. Using the economic profit formula, what is the continuing value for Appar- elCo as of year 57 Using discounted economic profit, what the value of REVIEW QUESTIONS 281 operations for ApparelCo? What percentage of ApparelCo's total operating value is attributable to current invested capital, to interim economic profits. and to economic profits in the continuing value period? 4. Since growth is stable for ApparelCo, you decide to start the continuing value with year 3 economic profits (ie, economic profits in year 3 and beyond are part of the continuing value). Using the economic profit for mula (and data provided in Question 1), what is the continuing value as of year 2? Using discounted economic profit, what is the value of opera- tions for ApparelCo? What percentage of ApparelCo's total operating value is attributable to the continuing value? How does this compare with the answer you obtained in Question 2? EXHIBIT 12.13 ApparelCo: Free Cash Flows and Economic Profit S million Today 2500 Year 1 2650 Year 2 2809 Year 3 2978 Year 4 315.6 Revenues Operating costs Operating margin 1225.0 25.0 1238.SI 26.5 12528 28.1 126801 29.8 1284.11 316 Continuing Years value Key value drivers. % 3346 3546 Return on new (3011) (31921 invested capital 33.5 355 Growth rate Operating taxes 18.4) (89) Cost of capital 25.1 26.6 15 6 25 10 Operating taxes NOPLAT 16.31 18.8 16.61 199 17.01 21.1 174 223 1791 237 Net investment Free cash flow (7.51 18.0 11311.9 18.4 126 1891 13.4 19.5 142 110.0 15.1 Economic profit NOPLAT 19.9 21.1 223 23.7 25.1 26.6 Invested capital Cost of capital, Capital charge 132.5 10.0 13.3 1405 100 14.0 148.9 100 14.9 157.8 10.0 158 1673 10.0 16.7 1773 100 17.7 Economic profit 6.6 70 7.4 79 8.4 8.9