Build a financial model on the following template. Assume that the WACC is 20%. Also assume the debt and equity remain the same. The FCF long-term growth rate is the same as the sales growth rate

1. Value the companys equity. (5 points) (Answer: 1357.898)

2. The model in Part A includes cost of goods sold but not selling, general, and administrative (SG & A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. Change the model to accommodate this new assumption. Show the resulting income statements, balance sheets, the free cash flows (FCF), and the valuation. (5 points) (answer: market value of equity: 468.55)

3. Build a data table in which you show the sensitivity of the equity value to the level of SG & A. Let SG & A vary from $0 per year to $600 per year. (5 points)

4. Back to Part A. Suppose that the fixed assets at cost follow the following step function:

Incorporate this function into the model and solve for the market value of equity. (5 points) (Answer: market value of equity: 2618.145)

5. Back to Part A again. Make two changes in the model: 1). Let debt be the plug and keep cash constant at its year-0 level. 2). Suppose that the firm has 1,000 shares and that it decides to pay, in year 1, a dividend per share of $0.15. In addition, suppose that it wants this dividend per share to growth in subsequent years by 12% per year. Incorporate these changes into the pro forma model and solve this model to get the market value of equity per share. (5 points) (Answer: price per share: 1.36)

Sales growth Current assets/sales Current liabilities/Sales Net fixed assets/ sales 10% 15% 8% 77% 3 cost of goods sold/sales depreciation rate interest rate on debt interest paid on cash and marketable securities tax rate dividend payout ratio 50% 10% 10% 8% 40% 40% Year O 1 2 3 4 5 1000 500 32 6 income statement sales cost of goods sold interest payment on debt interest earned on cash and marketable securities depreciation profits before tax taxes profits after tax dividends retained earnings 100 374 150 225 90 135 Balance sheet cash and marketable securities 80 current assets 150 1070 fixed assets At cost depreciation Net fixed assets 300 770 total assets 1000 80 320 current liabilities debt stock accumulated retained earnings total liabilities + Equity 450 150 1000 Sales growth Current assets/sales Current liabilities/Sales Net fixed assets/ sales 10% 15% 8% 77% 3 cost of goods sold/sales depreciation rate interest rate on debt interest paid on cash and marketable securities tax rate dividend payout ratio 50% 10% 10% 8% 40% 40% Year O 1 2 3 4 5 1000 500 32 6 income statement sales cost of goods sold interest payment on debt interest earned on cash and marketable securities depreciation profits before tax taxes profits after tax dividends retained earnings 100 374 150 225 90 135 Balance sheet cash and marketable securities 80 current assets 150 1070 fixed assets At cost depreciation Net fixed assets 300 770 total assets 1000 80 320 current liabilities debt stock accumulated retained earnings total liabilities + Equity 450 150 1000