1. Exhibit 8.18 displays the income statement and reorganized balance sheet for BrandCo, a consumer products company. Determine net operating profit less adjusted taxes (NOPLAT) for years 1 to 6. Assume an operating tax rate of 30 percent. Determine free cash flow for years 1 to 6.

EXHIBIT 8.18 BrandCo: Income Statement and Reorganized Balance Sheet
Income statement ($ million)	Today	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Revenues	3,777.1	4,041.5	4,304.2	4,583.9	4,859.0	5,126.2	5,382.5
Operating costs	(3,245.1)	(3,435.2)	(3,658.5)	(3,896.3)	(4,130.1)	(4,357.3)	(4,575.1)
Depreciation	(82.9)	(97.0)	(103.3)	(110.0)	(116.6)	(123.0)	(129.2)
Operating profits	449.1	509.2	542.3	577.6	612.2	645.9	678.2
Interest	(14.0)	(14.0)	(14.0)	(14.0)	(14.0)	(14.0)	(14.0)
Earnings before taxes	435.1	495.2	528.3	563.5	598.2	631.9	664.2
Taxes	(130.5)	(148.6)	(158.5)	(169.1)	(179.5)	(189.6)	(199.2)
Net income	304.6	346.6	369.8	394.5	418.7	442.3	464.9
1Accounts payable has been netted against inventory to determine operating working capital.
	Reorganized balance sheet	Today	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
	Operating working capital1	188.9	202.1	215.2	229.2	242.9	256.3	269.1
	Property and equipment	1,510.8	1,616.6	1,721.7	1,833.6	1,943.6	2,050.5	2,153.0
	Invested capital	1,699.7	1,818.7	1,936.9	2,062.8	2,186.5	2,306.8	2,422.1
	Debt	280.5	280.5	280.5	280.5	280.5	280.5	280.5
	Shareholders' equity	1,419.2	1,538.2	1,656.4	1,782.3	1,906.0	2,026.3	2,141.6
	Invested capital	1,699.7	1,818.7	1,936.9	2,062.8	2,186.5	2,306.8	2,422.1

2. BrandCo currently has 65.6 million shares outstanding. If the BrandCos shares are trading at $57 per share, what is the companys market capitalization (value of equity)? Assuming the market value of debt equals todays book value of debt, what percentage of the companys value is attributable to debt, what percentage is attributable to equity? When would the market value of debt not equal to the book value? Using these weights, compute the weighted average cost of capital. Assume the pretax cost of debt is 8 percent, the cost of equity is 12 percent, and the marginal tax rate is 30 percent.

3. Using the next five years of free cash flow computed in Question 1, an estimated continuing value at the end of year 5, and the weighted average cost of capital computed in Question 2, estimate BrandCos enterprise value. Assume a long-term growth rate in cash flows of 5 percent and a return on new invested capital (RONIC) of 15 percent. (BrandC0 currently has no non-operating assets.)

4. Assuming the market value of debt equals todays book value of debt, what is the intrinsic equity value for BrandCo? What is the value per share? Does it differ from the share price used to determine the cost of capital weightings in Question 2?

5. What are the three components required to calculate economic profit? Determine BrandCos economic profit in years 1 to 6?

6. Using economic profit in years 1 to 5 calculated in Question 5, an estimated continuing value at the end of year 5, and the weighted average cost of capital computed in Question 2, value BrandCo using the economicprofitbased key value driver model. Assume a long-term growth rate in cash flows of 5 percent and RONIC of 15 percent. Should discounted economic profit be greater than, equal to, or less than discounted free cash flow. Hint: Prior year invested capital must be used to determine ROIC and capital charge.

7. Using the information from Exhibit 8.18 and calculations from Question 1, calculate BrandCos equity value using the cash-flow-to-equity model. How does your valuation compare youre your answers in Questions 4 and 6?