11/26/18 Build a Model Problem Chapter: Problem: 12 11 Start with the partial model in the file Ch12 P11 Build a Model.xlsx on the textbook's Web site, which contains Henley Corporation's most recent financial statements. Use the following ratios and other selected information for the current and projected years to answer the next questions. Income Statement for the Year Ending December 31 (Millions of Dollars) 2019 Net Sales $ 800.0 Costs (except depreciation) $ 576.0 Depreciation $ 60.0 Earning before int. & tax $ 164.0 Less interest $ 32.0 Earning before taxes $ 132.0 Taxes (25%) $ 33.0 Net income before pref. div. $ 99.0 Preferred div. $ 9.0 Net income avail. for com. div. $ 90.0 Common dividends $ 30.0 Addition to retained earnings $ 60.0 le 0 0 0 0 0 Number of shares (in millions) Dividends per share Tax rate $ 10 3.00 25% Balance Sheets for December 31 (Millions of Dollars) Assets Cash Short-term investments Accounts receivable Inventories Total current assets $ Net plant and equipment Total Assets $ 2019 8.0 20.0 80.0 160.0 268.0 600.0 Liabilities and Equity Accounts Payable Notes payable Accruals Total current liabilities $ Long-term bonds $ Preferred stock $ Common Stock (Par plus PIC) $ Retained earnings Common equity $ Total liabilities and equity $ 2019 16.0 40.0 40.0 96.0 300.0 100.0 868.0 257.0 211.0 468.0 868.0 Inputs Actual Projected Projected Projected Projected 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 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% (Acct. Rec.)/Sales 10% 10% 10% 10% 10% Inventories/Sales 20% 20% 20% 20% 20% (Net PPE) Sales 75% 75% 75% 75% 75% (Acct. Pay.)/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 sheets necessary to calculate free cash flow. Partial Income Statement for the Year Ending December 31 (Millions of Dollars) Actual Projected Projected Projected Projected Income Statement Items 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 Net Sales $800.0 Costs (except depreciation) $576.0 Depreciation $60.0 Earning before int. & tax $164.0 Activate Projected Projected 12/31/22 12/31/23 Partial Balance Sheets for December 31 (Millions of dollars) Actual Projected Projected Operating Assets 12/31/2019 12/31/20 12/31/21 Cash $8.0 Accounts receivable $80.0 Inventories $160.0 Net plant and equipment $600.0 Operating Liabilities Accounts Payable Accruals $16.0 $40.0 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 (i.e., the same as the constant growth rate in sales) by the end of the forecast period. Actual Projected Projected Projected Projected Calculation of FCF 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 Operating current assets Operating current liabilities Net operating working capital Net PPE Total net operating capital NOPAT Investment in total net operating capital Free cash flow na Growth in FCF na Growth in sales na na c. Calculate the return on invested capital (ROIC=NOPAT/Total net operating capital) and the growth rate in free cash flow. What is the ROIC in the last year of the forecast? What is the long-term constant growth rate in free cash flow (gl is the growth rate in FCF in the last forecast period because all ratios are constant)? Do you think that Hensley's value would increase if it could add growth without reducing its ROIC? (Hint: Growth will add value if the ROIC > WACC/(1+WACC]). Do you think that the company will have a value of operations greater than its total net operating capital? (Hint: Is ROIC > WACC/(1+g_]?) Actual Projected Projected Projected Projected 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 Return on invested capital (ROICENOPAT/[Total net operating capital]) Weighted average cost of capital (WACC) WACC/(1+g) WACC/(1+WACC) 10.5% 10.5% 10.5% 10.5% na na 10.5% na na na na d. Calculate the current value of operations. (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 the annual growth rate beyond the horizon is equal to the growth rate at the horizon.) How does the current value of operations compare with the current amount of total net operating capital? Weighted average cost of capital (WACC) 10.5% Actual Projected Projected Projected Projected 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 Free cash flow Long-term constant growth in FCF Horizon value Present value of horizon value Present value of forecasted FCF Value of operations (JPV of HV] + [PV of FCF]) Total net operating capital e. Calculate the price per share of common equity as of 12/31/2019 Millions except price per share Actual 12/31/2019 Value of operations + Value of short-term investments Total value of company - Total value of all debt - Value of preferred stock Value of common equity Divided by number of shares Price per share 11/26/18 Build a Model Problem Chapter: Problem: 12 11 Start with the partial model in the file Ch12 P11 Build a Model.xlsx on the textbook's Web site, which contains Henley Corporation's most recent financial statements. Use the following ratios and other selected information for the current and projected years to answer the next questions. Income Statement for the Year Ending December 31 (Millions of Dollars) 2019 Net Sales $ 800.0 Costs (except depreciation) $ 576.0 Depreciation $ 60.0 Earning before int. & tax $ 164.0 Less interest $ 32.0 Earning before taxes $ 132.0 Taxes (25%) $ 33.0 Net income before pref. div. $ 99.0 Preferred div. $ 9.0 Net income avail. for com. div. $ 90.0 Common dividends $ 30.0 Addition to retained earnings $ 60.0 le 0 0 0 0 0 Number of shares (in millions) Dividends per share Tax rate $ 10 3.00 25% Balance Sheets for December 31 (Millions of Dollars) Assets Cash Short-term investments Accounts receivable Inventories Total current assets $ Net plant and equipment Total Assets $ 2019 8.0 20.0 80.0 160.0 268.0 600.0 Liabilities and Equity Accounts Payable Notes payable Accruals Total current liabilities $ Long-term bonds $ Preferred stock $ Common Stock (Par plus PIC) $ Retained earnings Common equity $ Total liabilities and equity $ 2019 16.0 40.0 40.0 96.0 300.0 100.0 868.0 257.0 211.0 468.0 868.0 Inputs Actual Projected Projected Projected Projected 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 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% (Acct. Rec.)/Sales 10% 10% 10% 10% 10% Inventories/Sales 20% 20% 20% 20% 20% (Net PPE) Sales 75% 75% 75% 75% 75% (Acct. Pay.)/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 sheets necessary to calculate free cash flow. Partial Income Statement for the Year Ending December 31 (Millions of Dollars) Actual Projected Projected Projected Projected Income Statement Items 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 Net Sales $800.0 Costs (except depreciation) $576.0 Depreciation $60.0 Earning before int. & tax $164.0 Activate Projected Projected 12/31/22 12/31/23 Partial Balance Sheets for December 31 (Millions of dollars) Actual Projected Projected Operating Assets 12/31/2019 12/31/20 12/31/21 Cash $8.0 Accounts receivable $80.0 Inventories $160.0 Net plant and equipment $600.0 Operating Liabilities Accounts Payable Accruals $16.0 $40.0 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 (i.e., the same as the constant growth rate in sales) by the end of the forecast period. Actual Projected Projected Projected Projected Calculation of FCF 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 Operating current assets Operating current liabilities Net operating working capital Net PPE Total net operating capital NOPAT Investment in total net operating capital Free cash flow na Growth in FCF na Growth in sales na na c. Calculate the return on invested capital (ROIC=NOPAT/Total net operating capital) and the growth rate in free cash flow. What is the ROIC in the last year of the forecast? What is the long-term constant growth rate in free cash flow (gl is the growth rate in FCF in the last forecast period because all ratios are constant)? Do you think that Hensley's value would increase if it could add growth without reducing its ROIC? (Hint: Growth will add value if the ROIC > WACC/(1+WACC]). Do you think that the company will have a value of operations greater than its total net operating capital? (Hint: Is ROIC > WACC/(1+g_]?) Actual Projected Projected Projected Projected 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 Return on invested capital (ROICENOPAT/[Total net operating capital]) Weighted average cost of capital (WACC) WACC/(1+g) WACC/(1+WACC) 10.5% 10.5% 10.5% 10.5% na na 10.5% na na na na d. Calculate the current value of operations. (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 the annual growth rate beyond the horizon is equal to the growth rate at the horizon.) How does the current value of operations compare with the current amount of total net operating capital? Weighted average cost of capital (WACC) 10.5% Actual Projected Projected Projected Projected 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23 Free cash flow Long-term constant growth in FCF Horizon value Present value of horizon value Present value of forecasted FCF Value of operations (JPV of HV] + [PV of FCF]) Total net operating capital e. Calculate the price per share of common equity as of 12/31/2019 Millions except price per share Actual 12/31/2019 Value of operations + Value of short-term investments Total value of company - Total value of all debt - Value of preferred stock Value of common equity Divided by number of shares Price per share