1. Exhibit 8.18 displays the income statement and reorganized balance sheet for BrandCo, a consumer products company. Using the methodology outlined in Exhibit 8.5, determine net operating profit less adjusted taxes (NOPLAT) for years 1 to 6. Assume an operating tax rate of 30 percent. Using the methodology outlined in Exhibit 8.6, determine free cash flow for years 1 to 6. EXHIBIT 8.18 BrandCo: Income Statement and Reorganized Balance Sheet $million Income statement Revenues Operating costs Depreciation Operating profits Today Year Year 2 Year3 Year4 Year5 Year 6 ,777. 4,041.5 4304 4,583.9 4,859.0 5,126.2 5,382.5 3,245.) 3,435.2 (3,658.5) (3,896.3) 4,130.1) 43573 4,575.1) (82.9) (97.0) 103.3 (110.0) 16.6) 123.0) (129.2) 509.2 542.3 577.6 612.2 645.9 678.2 449.1 (14.0 14.0 40)14.0 .0 4.0 14.0) 495.2528.3 563.5 598.2 631.9 664.2 Interest Eamings before taxes Taxes Net income (130.5) (148.6 158.5) 169. 179.5) 89.6 (199.2) 304.6 346.6 369.8 394.5 418.7442.3 464.9 Reorganized balance sheet Operating working capital Property and equipment Invested capital 188.9 202.1215.2 229.2 242.9 256.3 269.1 1,510.8 1,616.67217833.6 1,943.6 2,050.5 2,153.0 1,699.71,818.71,936.9 2,062.8 2,186.5 2,306.8 2,422. Shareholders' equity Invested capital 280.5 280.5 280.5 280.5 280.5 280.5 280.5 419.2 538. 656.4 ,782.3 1,906.0 2,026.3 2,141.6 1,699.7 ,818.7,936.9 2,0628 2,186.5 2,306.8 2,422.1 Accounts payable has been netted against inventory to determine operating working capital. 2. BrandCo currently has 65.6 million shares outstanding. If BrandCos shares are trading at $57 per share, what is the company's market capitalization (value of equity)? Assuming the market value of debt equals today's book value of debt, what percentage of the company's value is attributable to debt, and what percentage is attributable to equity? would the market value of debt not equal 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. When 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 235 cost of capital computed in Question 2, estimate BrandCo's 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. (BrandCo currently has no nonoperating assets.) 4. Assuming the market value of debt equals today's 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 BrandCo's economic profit in vears 1 to 6 6. Using the economic profit for 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 economic- profit-based key value driver model. Assume a long-term growth rate in cash flows of 5 percent and a 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 and capital charge. 7. Using the information from Exhibit 8.18 and calculations from Question 1, calculate BrandCo's equity value using the cash-flow-to-equity model. How does your valuation compare with your answers in Questions 4 and 6? XHIBIT 8.5 UPS and FedEx: Historical ROIC Analysis $ million UPS FedEx 011 2012 2013 3,105 54,127 55,438 42,680 44,287 45,567 26,908) (27,581) (28,941) 16,133) (16,547) 16,688) 7,232) (7,354) (7,486 6,335) (7,272) (8,011) 4,046) 4,090) 4,027) 4,956) (4,746 4,557) 1,554) (1,614) (1,682) 2,095) (2,359) (2,564) 011 2012 2013 Revenues Compensation and benefits Purchased transportation Fuel Depreciation Amortization, capitalized software Other expenses Operating EBITA (206) 216) (165) 6,15) (6,147) 6,164) 8,75 (9,109) (9,300) 7,008 7,125 6,97 ,410 4,254 4,447 Operating cash taxes NOPLAT 2,155) 2,238) (2,289) ,853 4,887468 (725) (1,297) 1,540 3,685 2,957 2,907 Invested capital Operating working capital Property, plant, and equipment, net Capitalized operating leases Intangible assets, capitalized software Other operating assets, net of liabilities Invested capital (excluding goodwill 2,119 1,719 1,648 1,577 ,211 1,853 7,621 17,894 17,96 17,248 18,484 19,550 ,684 5,428 5,841 20,688 22,195 23,427 88 415 1,060)948)(984) 705 (903) (1031 24,752 24,508 24,989 38808 40,987 43,799 Goodwill and acquired intangibles, less tax gross-up Cumulative amortization and impairment Invested capital (including goodwill 2,225 636 2,826 2,026 2,043 2,057 7,614 27,458 28,004 43,242 45,830 48,682 2,295 2.349 40 2,800 655 667 Return on invested capital, % ROIC excluding goodwill (average ROIC including goodwill (average 19.9 19.8 18.9 17.8 17.7 16.9 9.8 8.8 7.4 6.6 6.9 6.2 Compensation and benefits, excluding severance, other restructuring charges, and pension adjustments Other expenses,excluding gains (losses) on asset sales, operating lease interest, and deferred gains on sale/leaseback transactions Goodwill includes goodwill and acquired intangibles, cumulative amortization and impairments, less tax gross-up related to amortization XHIBIT 8.6 UPS and FedEx: Free Cash Flow Calculation S million UPS FedEx 11 2012 2013 21 2012 NOPLAT Depreciation Amortization of capitalized software Gross cash ow ,853 4,887 4684 3,685 2,957 2,907 554 1,614 1,682 2095 2,359 2,564 5.780 5316 5,471 (308) 366 (643) 165 6,613 6,7176,531 206 216 Decrease (increase) in operating working capital Capital expenditures, net of disposals Investments in capitalized operating leases Investments in capitalized software Investments in goodwill and acquired intangibles Decrease (increase) in other operating assets, net of liabilities Foreign-currency translation Gross investment 2 401 1,788) (1,887) 1,749 13,800) (3,595 (3,630) 39 255 (412) 694) (1,507) 1.232) 229) (243 (273) 11(88) ) (7040940 470) (112) 36 (92) 294 (260) 12) 1981 28 95) 41 2.538) (1.380) 12654) 14979 (4.906) (5,4411 Free cash flow 075 5.3373.877 30 Nonoperating income (expenses) Decrease (increase) in excess cash Decrease (increase) in other nonoperating assets Nonoperating cash flow 387 301 382 16)48 129 (3,629) 2,698 447) (2,042) 2,035 58 271 86 (3,745 3.052 53 65) (2,058) 2,519 Cash flow available to investors 761 1,592 6.930 37 1,649 2,548 Reconciliation of cash flow available to investors interest expen Operating lease interest expense Decrease (increase) in deb Decrease (increase) in capitalized operating leases Pension and postretirement benefits, net cash out (inl Flows to debt holders 48 393 380 72 233 264 011,132 282) (1,742 1,998 39 255 412) (1,507) (1,232 87 479) (811 486 (1.339) 1.419615 1672) (1.796) 52 82 160 8 (1,323) (1,747) Cash dividends Repurchased (issued) share Decrease (increase) in noncontrolling interests lows to equity holders 086 2.243 2.367 164 176187 42) (153)4,15 2,194 695 3078 4,275 2,931 551 4,761 1,592 6930 3 4,344 Cash flow available to investors 37 1,649 2,548 Charge in pension and postretirement benefits is detailed in Exhibit 8 16