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. c. Calculate the return on invested capital (ROIC=NOPAT/Average 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 Fairchild'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 ] ?) Projected ratios and selected information for the current and projected years are shown below. 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) \begin{tabular}{|l|r|r|r|r|r|} & Actual & Projected & Projected & Projected & Projected \\ \hline Income Statement Items & 12/31/2022 & 12/31/23 & 12/31/24 & 12/31/25 & 12/31/26 \\ \hline Net Sales & $800.0 & $888.0 & $985.7 & $1,094.1 & $1,214.5 \\ \hline Costs (except depreciation) & $576.0 & & & & \\ \hline Depreciation & $40.0 & & & \\ \hline Total operating costs & $616.0 & & & \\ \hline Earning before int. \& tax & $184.0 & & & \\ \hline \end{tabular} Partial Balance Sheets for December 31 (Millions of Dollars) d. Calculate the current value of operations. (Hint: First calculate the terminal 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 2026 is 3%. How does the current value of operations compare with the current amount of total net operating capital? Weighted average cost of capital (WACC) Free cash flow Long-term constant growth in FCF Horizon value Present value of horizon value Present value of forecasted FCF Value of operations (]PV of HV] + [PV of FCF]) Total net operating capital 8.5% \begin{tabular}{|r|r|r|r|r|} \hline Actual & Projected & Projected & Projected & Projected \\ \hline 12/31/2022 & 40.012/31/23 & $0.012/31/24 & $0.012/31/25 & $0.012/31/26 \\ \hline & & & & 3.0% \\ \hline & & & & - \\ \hline & & & & \\ \hline & & & & \\ \hline 5592.0 & & & & \\ \hline \end{tabular} e. Calculate the price per share of common equity as of 12/31/2022 Millions except price per share 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 Actual 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. c. Calculate the return on invested capital (ROIC=NOPAT/Average 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 Fairchild'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 ] ?) Projected ratios and selected information for the current and projected years are shown below. 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) \begin{tabular}{|l|r|r|r|r|r|} & Actual & Projected & Projected & Projected & Projected \\ \hline Income Statement Items & 12/31/2022 & 12/31/23 & 12/31/24 & 12/31/25 & 12/31/26 \\ \hline Net Sales & $800.0 & $888.0 & $985.7 & $1,094.1 & $1,214.5 \\ \hline Costs (except depreciation) & $576.0 & & & & \\ \hline Depreciation & $40.0 & & & \\ \hline Total operating costs & $616.0 & & & \\ \hline Earning before int. \& tax & $184.0 & & & \\ \hline \end{tabular} Partial Balance Sheets for December 31 (Millions of Dollars) d. Calculate the current value of operations. (Hint: First calculate the terminal 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 2026 is 3%. How does the current value of operations compare with the current amount of total net operating capital? Weighted average cost of capital (WACC) Free cash flow Long-term constant growth in FCF Horizon value Present value of horizon value Present value of forecasted FCF Value of operations (]PV of HV] + [PV of FCF]) Total net operating capital 8.5% \begin{tabular}{|r|r|r|r|r|} \hline Actual & Projected & Projected & Projected & Projected \\ \hline 12/31/2022 & 40.012/31/23 & $0.012/31/24 & $0.012/31/25 & $0.012/31/26 \\ \hline & & & & 3.0% \\ \hline & & & & - \\ \hline & & & & \\ \hline & & & & \\ \hline 5592.0 & & & & \\ \hline \end{tabular} e. Calculate the price per share of common equity as of 12/31/2022 Millions except price per share 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 Actual