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
Income Statement Items	2018/12/31	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
Operating Assets	2018/12/31	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
Calculation of FCF	2018/12/31	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

Income Statement for the Year Ending December 31 (Millions of Dollars) 2018 S Net Sales 800.0 Costs (except depreciation) Depreciation S 576.0 S 60.0 Total operating costs S 636.0 S Earning before int. & tax 164.0 S Less interest 32.0 Earning before taxes Taxes (40%) 132.0 52.8 S Net income before pref. div. 79.2 Preferred div. 1.4 Net income avail. for com. div. 77.9 S Common dividends 31.1 Addition to retained earnings 46.7 Number of shares (in millions) Dividends per share 10 3.11 Balance Sheets for December 31 (Millions of Dollars) Liabilities and Equity Accounts Payable Notes payable Assets 2018 2018 Cash 8.0 16.0 Short-term investments 20.0 40.0 80.0 Accounts receivable Accruals 40.0 Inventories 160.0 Total current liabilities $ 96.0 S Total current assets 268.0 Long-term bonds 300.0 Net plant and equipment 15.0 600.0 Preferred stock (Par plus PIC) S Total Assets 868.0 257.0 Retained earnings 200.0 S Common equity 457.0 Total liabilities and equit $ 868.0 Projected ratios and selected information for the current and projected years are shown below. Inputs Actual Projected Projected 2018/12/31 Projected Projected 12/31/21 12/31/19 12/31/20 12/31/22 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 (Acct. Pay.)/Sales 75% 75% 75% 75% 75% 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%