Aluminium Distributing Company is a wholesale aluminum distributor which purchases aluminum in carload lots and sells to several thousand aluminum users. The nature of the aluminum business requires that the company maintain large inventories to take care of customer requirements in the event of strikes or other delays. Assume that Aluminium Distributing Company is put for sale at the end of the current year, assumed today. What should be the fair market value (FMV) for Aluminium Distributing?
In examining records from for the past twenty years, the company found consistent relationships among the following accounts as a percent of sales:
Sales	100%
Current Assets	35% of Sales
Fixed Assets	60% if Sales $110 million; 75% otherwise
Accounts Payable	20% of Sales
Other Current Liabilities	5% of Sales
Profit Margin (=NI/Sales)	15% of Sales
Interest Rate	6.0%
Tax Rate	28%
Number of shares outstanding	2,100,000
Market price per share today	$79
The companys sales for the current year were $95 million. It has $60 million net fixed assets. The company expects to grow by $10 million per year over the next 5 years (year 1-year 5). The company wants to project its financial statements, financial ratios and financing requirements for each of the next 5 years, assuming that the projected sales levels are achieved. Assume further that the company pays out 55 percent of earnings as dividends.
QUESTIONS
1. Construct proforma balance sheets for the end of each of the next 5 years (year 1-year 5), assuming that external capital needs are financed 40 percent by issuing new long-term debt, and 60 percent by selling new common stock. Hint: use Tables 1A, 1B and 1C in the attached EXCEL sheet to solve question 1 and prepare necessary data for other questions.
2. Using the book values information in your answer to question (1), - Calculate the following ratios: return on equity (ROE), return on assets (ROA), return on capital (ROC), economic value added (EVA), operating profit margin (OPM), assets turnover (TAT), long-term debt (LTD) ratio, long-term debt-equity (D/E) ratio, total debt (TD)ratio, times interest earned ratio (TIE), net working capital to total assets, current ratio (CR), and sustainable growth rate. Note: all ratios formulas are shown in Table 2. - Conduct a trend analysis for the calculated ratios over the next 5 years. - Comment on each ratio.
3. Using the information in your answer to question (1), calculate net cash flows (NCF) at the end of each of the next five years (including terminal value at the end of year 5). Assume that all fixed assets are depreciated using the straight line method. Note that additional capital expenditures are equal to changes in fixed assets from one year to another.
4. Using the DCF method, what is the NPV for Aluminium Distributing? Is this NPV acceptable?Here are some hints: - Use the NCF calculated in question (3) as your net cash flows for each of the next 5 years. - Assume that the risk free rate is 2.8%, required market rate of return is 10.6%, and Aluminium Distributing (assets) beta is 1.1. Assume that RADR (i.e., WACC) will remain constant for the next five years. - Use Gordon model (V=CF1/r-g) to calculate the terminal value of Aluminium Distributing at the end of this year; i.e., today. For that, assume a permanent constant growth rate in NCF of 2.5% starting year 6. - Calculate Aluminium Distributing NPV. Assume initial investment equals to book value of total assets minus current liabilities at the end of the current year.
Aluminium Distributing Spreadsheet
Table 1A. Aluminium Distributing Company
PRO FORMA Balance Sheet
For the Next 5 Years
(Thousand of Dollars)
Year	Year 0	Year 1E	Year 2E	Year 3E	Year 4E	Year 5E
Sales	95,000
Current Assets	23,750
Fixed Assets	60,000
Depreciation Rate at 20%	12000
Net Fixed Assets	48,000
Total Assets	71,750
Accounts Payable	15,200
Other Current Liabilities	5,700
Total Current Liabilities	20,900
L/T Debt	12,500
Common Stock	20,350
Retained Earnings	18,000
Total Liabilities & Equity	71,750
Interest Payment (@ 6.0%)	383.0
Table 1B. Aluminium Distributing Company
PRO FORMA Income Statement
For the Next 5 Years
(Thousand of Dollars)
Year	Year 0	Year 1E	Year 2E	Year 3E	Year 4E	Year 5E
Sales	95,000.00
Cost of Goods Sold	NA	NA	NA	NA	NA	NA
Selling & Administrative Expenses	NA	NA	NA	NA	NA	NA
Depreciation
Earnings Before Interest & Taxes
Interest Payment (@ 6%)
Taxes (@28%)
Net Income (@ PM=15%)
Dividends (55% Payout Ratio)
New Additional Retained Earnings (45% Retention Ratio)
Table 1C. Aluminium Distributing Company
Additional Calculations
For the Next 5 Years
(Thousand of Dollars)
Year	Year 0	Year 1E	Year 2E	Year 3E	Year 4E	Year 5E
Change in Current Assets	NA
Change in Fixed Assets	NA
Change in Net Fixed Assets	NA
Change in Total Assets	NA
Change in Current Liabilities	NA
New Total Financing Needs (TFN)	NA
New Additional Retained Earnings	NA
New External Financing Needs (EFN)	NA
New Additional External Debt	NA
New Additional External Equity (i.e., Common Stocks)	NA