Background: On 3 September 2008, the Coca-Cola Company offered to buy China Huiyuan Juice Group, the nation's largest juice maker (which was listed on Hong Kong Stock Exchange), for HKD17.92 billion in cash. The acquisition was halted by the Chinese regulator; on 18 March 2009, China's Ministry of Commerce (MOC) announced that Coca-Cola's bid to acquire Huiyuan failed to meet the country's anti-monopoly law. Huiyuan's stock price gained 149 percent after Coca-Cola's announcement, which then quickly disappeared upon MOC's disapproval.

Questions: In early 2008, in preparation for negotiation with Coca-Cola for a possible deal, the chief financial officer (CFO) of Huiyuan, Mr. Francis Ng, worked to evaluate the fair value of his company. He started with forecasting. Suppose you were a member of the financial team led by Mr. Ng and worked on the five-year forecast of the financial statements for the period of 2008-2012. The firm's balance sheets and income statements of the years 2005-2007 are given. Corporate income was expected to be taxed at the marginal tax rate of 25%.

1. Huiyuan's sales growth during the forecast years was expected to maintain the historical average for the first two years, and then slow down to 18%, 14% and 10%, respectively, for the remaining years. Complete the forecast table using historical average ratios wherever applicable. Forecast depreciation as a percentage of the prior year's net fixed assets. Huiyuan planned to increase its long-term debt by 20% each year, by issuing corporate bonds, throughout the forecast period. Each year's current portion was about 4.5% of the previous year's long-term debt. The company planned to maintain its dividend payout policy, raise no equity, and use either overdrafts (new short-term borrowings) or excess cash as the funding plug to balance the balance sheet. The interest rate was 7.5% on Huiyuan's long-term debt, 2.5% on excess cash (as deposit), and 13.0% on overdrafts (including bank fees). Interest expenses are determined based on the previous year's amounts of debt, involving no circularity problem. (4 points)

Income Statements (thousand dollars) 2005-12-31 2006-12-31 2007-12-31 2008E 2009E 2010E 2011E 2012E 2005 2006 2007 Average Sales 1,824,947 2,163,574 2,655,282 3,203,360 3,864,567 4,560,189 5,198,616 5,718,477 n/a 18.6% 22.7% 20.6% Growth rate 65.7% as % of sales Cost of sales 1,214,242 1,419,973 1,724,969 2,104,931 2,539,411 2,996,505 3,416,016 3,757,618 66.5% 65.6% 65.0% Gross profit 610,705 743,601 930,313 1,098,429 1,325,156 1,563,684 1,782,600 1,960,860 Operating expenses 275,712 315,455 361,821 462,508 557,975 658,410 750,588 825,647 15.1% 14.6% 13.6% 14.4% as % of sales Depreciation 59,497 67,132 88,106 142,125 140,004 168,902 199,304 227,207 n/a 4.5% 4.4% 4.4% as % of fixed assets EBIT 275,496 361,014 480,386 493,795 627,177 736,372 832,708 908,006 Interest expense 21,171 12,790 16,234 114,180 140,188 168,225 201,871 242,245 Earnings before tax 254,325 348,224 464,152 379,616 486,989 568,146 630,837 665,761 Tax expense 60,868 85,837 120,927 94,904 121,747 142,037 157,709 166,440 23.9% 24.6% 26.1% 24.9% as % of taxable income Net income 193,457 262,387 343,225 284,712 365,242 426,110 473,128 499,321 40.0% 40.0% 40.0% 40.0% as % of net income Dividends 77,383 104,955 137,290 113,885 146,097 170,444 189,251 199,728 Increase in retained earnings 116,074 157,432 205,935 170,827 219,145 255,666 283,877 299,593Balance Sheets (thousand dollars) 2005-12-31 2006-12-31 2007-12-31 2008E 2009E 2010E 2011E 2012E 2005 2006 2007 Average Cash 118,994 153,810 125,079 5.5% 7.1% 4.7% 6.1% Accounts receivable 1,083,974 988,024 1,432,852 59.4% 45.7% 54.0% 53.0% as % of sales Inventories 428,762 639,688 722,044 23.5% 29.6% 27.2% 26.8% as % of sales Other current assets 26,975 46,341 105,601 1.5% 2.1% 4.0% 2.5% as % of sales Total current assets 1,658,705 1,827,863 2,385,576 Net fixed assets 1,487,470 2,015,352 3,199,243 3,151,495 3,801,997 4,486,356 5,114,446 5,625,891 81.5% 93.1% 120.5% 98.4% as % of sales Other assets (operating) 430,778 579,121 1,025,317 23.6% 26.8% 38.6% 29.7% as % of sales Total assets 3,576,953 4,422,336 6,610,136 Current portion of long-term debt 10,582 20,854 21,056 67,560 81,073 97,287 116,744 140,093 Accounts payable 434,375 433,359 519,095 23.8% 20.0% 19.5% 21.1% as % of sales Other current liabilities 805,800 847,549 1,198,548 44.2% 39.2% 45.1% 42.8% as % of sales Total current liabilities 1,250,757 1,301,762 1,738,699 Long-term debt 145,788 456,415 1,501,343 1,801,612 2,161,934 2,594,321 3,113,185 3,735,822 Common stock 725,000 1,051,319 1,551,319 Retained earnings 1,455,408 1,612,840 1,818,775 Total liabs. & equity 3,576,953 4,422,336 6,610,136