Example of a Discounted Cash Flow Analysis ($ miillions) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Sales 3582 3840 4116 4413 4730 5071 5436 5828 6247 6696 Operating Income 330 357 387 419 454 492 533 577 625 676 Other income - Corporate expenses (14) (14) (14) (14) (14) (14) (14) (14) (14) (14) EBIT 316 343 373 405 440 478 529 563 611 662 d Net Income 186 202 220 239 260 282 312 332 360 391 Change in NWC 0 0 0 0 0 41 42 45 49 52 Cash Flow 186 202 220 239 260 242 270 287 311 339 a. Growing at 7.2% a year. b. Operating margin improving from 9.2% -10.1% over ten years. Here operating income does not reflect other income, interest expense or corporate expense. c. FY 1988: $29.2 $42.8 = -$13.6 d. Tax rate = 41% Furniture Group Footware Group Apparel Group Retail Group Total 7.7% 6.3% 13.1-14.1% 9.1% -10.4% 7.1% 6.4%-7.0% 7.6% 6.5%-7.5% 7.2% 9.2% -10.1% 1x 1x 1x 1x 1x 12.5% 12.5% 12.5% 7.5% 11.6% 41.0% Exhibit 12 Discounted Cash Flow Analysis Assumptions Sales growth a Operating margin range Capital expenditures b Increase in working investment Tax rate C Ten-year annual compound growth rate Projected operarting margin in 1989 and in 1998 As a multiple of depreciation As a percent of the change in sales in 1994 forward Question 6 (6 points) Let's value Interco using a discounted free cash flow valuation. Given our assumptions, calculate Interco's total firm value using a discount rate for Interco's free cash flow (WACC) of 10%. Hint: Exhibit 12 rev