8/3/15
Chapter:	12
Problem:	11
Start with the partial model in the file Ch12 P11 Build a Model.xlsx on the textbooks Web site, which contains Henley Corporations 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)
	2016
Net Sales	$ 800.0
Costs (except depreciation)	$ 576.0
Depreciation	$ 60.0
Total operating costs	$ 636.0
Earning before int. & tax	$ 164.0
Less interest	$ 32.0
Earning before taxes	$ 132.0
Taxes (40%)	$ 52.8
Net income before pref. div.	$ 79.2
Preferred div.	$ 1.4
Net income avail. for com. div.	$ 77.9
Common dividends	$ 31.1
Addition to retained earnings	$ 46.7
Number of shares (in millions)	10
Dividends per share	$ 3.11
Balance Sheets for December 31 (Millions of Dollars)
Assets	2016		Liabilities and Equity		2016
Cash	$ 8.0		Accounts Payable		$ 16.0
Short-term investments	20.0		Notes payable		40.0
Accounts receivable	80.0		Accruals		40.0
Inventories	160.0		Total current liabilities		$ 96.0
Total current assets	$ 268.0		Long-term bonds		$ 300.0
Net plant and equipment	600.0		Preferred stock		$ 15.0
Total Assets	$ 868.0		Common Stock (Par plus PIC)		$ 257.0
			Retained earnings		200.0
			Common equity		$ 457.0
			Total liabilities and equity		$ 868.0
Projected ratios and selected information for the current and projected years are shown below.
Inputs	Actual	Projected	Projected	Projected	Projected
	12/31/2016	12/31/17	12/31/18	12/31/19	12/31/20
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	12/31/2016	12/31/17	12/31/18	12/31/19	12/31/20
Net Sales	$800.0
Costs (except depreciation)	$576.0
Depreciation	$60.0
Total operating costs	$636.0
Earning before int. & tax	$164.0
Partial Balance Sheets for December 31 (Millions of Dollars)
	Actual	Projected	Projected	Projected	Projected
Operating Assets	12/31/2016	12/31/17	12/31/18	12/31/19	12/31/20
Cash	$8.0
Accounts receivable	$80.0
Inventories	$160.0
Net plant and equipment	$600.0
Operating Liabilities
Accounts Payable	$16.0
Accruals	$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	12/31/2016	12/31/17	12/31/18	12/31/19	12/31/20
Operating current assets
Operating current liabilities
Net operating working capital
Net PPE
Total net operating capital
NOPAT
Investment in total net operating capital	na
Free cash flow	na
Growth in FCF	na	na
Growth in sales
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+gL]?)
							Actual	Projected	Projected	Projected	Projected
							12/31/2016	12/31/17	12/31/18	12/31/19	12/31/20
						Return on invested capital (ROIC=NOPAT/[Total net operating capital])	na
						Weighted average cost of capital (WACC)	na
						WACC/(1+gL)		na	na	na
						WACC/(1+WACC)		na	na	na