Crater Lake Manufacturing had the following financial statements for last year. All numbers are in thousands.

 

Income Statement

	Last Year
Sales	$60,000
COGS	25,000
Gross Margin	35,000
Operating Expenses	20,000
EBIT	15,000
Interest	5,000
Earnings before Tax	10,000
Taxes (26%)	2,600
Net Income	7,400

 

Balance Sheet

Assets		Claims
Cash	$    6,000	Acts Payable	$   9,000
Acts Receivable	12,000	Accruals	6,000
Inventories	24,000	Notes Payable	2,000
Current Assets	42,000	Current Liabilities	17,000
Net Fixed Assets	90,000	L-T Debt	50,000
Marketable Securities	2,000	Common Stock	50,000
		Retained Earnings	17,000
Total Assets	134,000	Total Claims	134,000

 

The company is experiencing a high rate of growth due to the introduction of some new products. The company expects sales to grow 25% this year. Develop pro forma financial statements for this year using the percent of sales method. Use an interest rate of 10% on the balance of debt at the beginning of the year. Assume assets, except the marketable securities which will remain unchanged, spontaneous liabilities, and operating costs increase by the same percentage as sales. Further, assume dividends will be 20% of net income. Assume additional funds needed will be covered by $20,000 of long-term debt and the remaining amount financed with notes payable. No new stock will be issued. Round all numbers to even thousands.

 

After you have developed the financial statements for this year, answer the following questions.

 

1. Based on the pro forma financial statements, what is the amount of additional funds needed?

 

2. Using the AFN formula, identify the additional funds needed.

 

3. Calculate the free cash flow for this year (FCF₁).

 

4. What is the operating profitability (OP) and capital requirements (CR) for last year and this year?

 

5. Assume free cash flow in the year after this one in $5,000 (FCF₂) and the year after than is $10,000 (FCF₃). After year three, FCF grows forever at 6%. Calculate the value of operations. Assume the WACC is 12%.

 

6. What is the total corporate value?